financial statement effects

Question 1

Income statement effect:

Answer 1

When prices rising, FIFO produces higher profit
When prices falling, opposite is true

Question 2

Balance sheet effect:

Answer 2

FIFO provides the most current valuation of inventory

Question 3

Cost formula should be used consistently

Answer 3

• Enhances comparability of statements over time
• Choose the method that best corresponds with actual physical flow

Question 4

INVENTORY ERRORS

Answer 4

Errors in inventory affect both income statement and balance sheet
- Through the calculation of cost of goods sold
- An error could affect COGS and net income

Question 5

Ending inventory

Answer 5

• Ending inventory of one period becomes beginning inventory of the next period
• Errors in ending inventory carry over to the following period

Question 6

BALANCE SHEET ERRORS

Answer 6

Effect can be determined by using the basic accounting equation:
Assets = Liabilities + Owner’s Equity
An error in ending inventory in one period will cause an error in beginning inventory in the next period