I. When prices are rising, higher income will be reported using FIFO as compared with using LIFO.II. Inventory methods can be changed at will to control reported net income.III. An overstated ending inventory leads to understated net income.

INTRODUCTION TO COST ACCOUNTING

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

A	True, False, False
B	True, True, True
C	False, False, False
D	True, False, True

Explanation:

Detailed explanation-1: -If prices are rising through the year, using the recent inventory LIFO method will result in a higher COGS and lower ending inventory value than with the FIFO method. Using the LIFO accounting method here would yield lower profits and lower taxable income.

Detailed explanation-2: -“Because FIFO results in a higher net income during periods of rising prices, it also results in higher income tax expenses, ” Ng said. “Conversely, if the LIFO method is used during a period of rising prices, it will result in lower net income. So, this method would result in a lower income tax expense.”

Detailed explanation-3: -Since inventory costs have increased in recent times, LIFO shows higher COGS and lower net income – whereas COGS is lower under FIFO, so net income is higher.

Detailed explanation-4: -FIFO leaves the newer, more expensive inventory in a rising-price environment, on the balance sheet. As a result, FIFO can increase net income because inventory that might be several years old–which was acquired for a lower cost–is used to value COGS.

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