Inventory

Question 1

What is the effect of an understatment of ending inventory?

Answer 1

An understatement of ending inventory results in an overstatement of cost of goods sold which results in an understatement of net income and retained earnings.

Question 2

What is the effect of using FIFO in period of rising prices?

Answer 2

In periods of rising prices, FIFO results in the highest ending inventory and lowest costs of goods sold and the highest net income. (i.e, current costs are not matched with current revenues)

Question 3

What is the result of LIFO in period of rising prices?

Answer 3

In periods of rising prices, LIFO results in lowest ending inventory, highest cost of goods sold, and lowest net income.

Question 4

LIFO Periodic

What is the LIFO valuation of ending inventory?

Answer 4

Ending inventory in units x oldest cost