BUISENESS MANAGEMENT
MERCHANDISING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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FIFO
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LIFO
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weighted average
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gross profit
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Detailed explanation-1: -First In, First Out, commonly known as FIFO, is an asset-management and valuation method in which assets produced or acquired first are sold, used, or disposed of first. For tax purposes, FIFO assumes that assets with the oldest costs are included in the income statement’s cost of goods sold (COGS).
Detailed explanation-2: -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-3: -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.
Detailed explanation-4: -FIFO is most successful in industries where a product’s price remains steady and the company sells its oldest products first. That’s because FIFO is based on the cost of the first goods purchased, ignoring any increases or reductions in price for newer units.