In periods of inflation, phantom or paper profits may be reported as a result of using the FIFO (First-In, First-Out) costing assumption.

Here's why:

1. The FIFO method assumes that the oldest inventory items are sold first.

2. In periods of inflation, the cost of inventory items tends to increase over time.

3. Therefore, when a company sells its oldest inventory (which was acquired at a lower cost), it reports higher profits because the cost of goods sold (COGS) is lower.

4. However, these profits are "phantom" or "paper" profits because they are not based on the current market value of the inventory. If the company were to replace its sold inventory with new inventory items (which are more expensive due to inflation), its profits would decrease.

5. Therefore, the FIFO costing assumption can result in inflated profit figures during periods of inflation.

Question

In periods of inflation, phantom or paper profits may be reported as a result of using the FIFO (First-In, First-Out) costing assumption.

Here's why:

1. The FIFO method assumes that the oldest inventory items are sold first.

2. In periods of inflation, the cost of inventory items tends to increase over time.

3. Therefore, when a company sells its oldest inventory (which was acquired at a lower cost), it reports higher profits because the cost of goods sold (COGS) is lower.

4. However, these profits are "phantom" or "paper" profits because they are not based on the current market value of the inventory. If the company were to replace its sold inventory with new inventory items (which are more expensive due to inflation), its profits would decrease.

5. Therefore, the FIFO costing assumption can result in inflated profit figures during periods of inflation.

Knowee AI · Accepted Answer

In periods of inflation, phantom or paper profits may be reported as a result of using the FIFO (First-In, First-Out) costing assumption.

Here's why:

1. The FIFO method assumes that the oldest inventory items are sold first.

2. In periods of inflation, the cost of inventory items tends to increase over time.

3. Therefore, when a company sells its oldest inventory (which was acquired at a lower cost), it reports higher profits because the cost of goods sold (COGS) is lower.

4. However, these profits are "phantom" or "paper" profits because they are not based on the current market value of the inventory. If the company were to replace its sold inventory with new inventory items (which are more expensive due to inflation), its profits would decrease.

5. Therefore, the FIFO costing assumption can result in inflated profit figures during periods of inflation.

In periods of inflation, phantom or paper profits may be reported as a result of using theGroup of answer choicesperpetual inventory methodFIFO costing assumptionLIFO costing assumptionperiodic inventory method

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