Assuming purchase costs are rising in a periodic inventory system, determine which of the statements below are correct regarding the cost of goods sold under FIFO, LIFO and weighted average cost flow methods.Multiple select question.Companies using FIFO will report the highest gross profit and net income.Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal.Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.Companies using LIFO will report the smallest cost of goods sold.
Question
Assuming purchase costs are rising in a periodic inventory system, determine which of the statements below are correct regarding the cost of goods sold under FIFO, LIFO and weighted average cost flow methods.Multiple select question.Companies using FIFO will report the highest gross profit and net income.Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal.Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.Companies using LIFO will report the smallest cost of goods sold.
Solution
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Companies using FIFO will report the highest gross profit and net income: This statement is correct. In a rising cost environment, the First-In, First-Out (FIFO) method assumes that the earliest goods purchased are the first to be sold. Therefore, the costs of the older, cheaper goods are recorded in cost of goods sold (COGS), resulting in a higher gross profit and net income.
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Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal: This statement is correct. Since FIFO results in higher net income, it also results in a higher taxable income, leading to higher taxes.
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Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold: This statement is correct. The weighted average cost method averages out the cost of all the goods available for sale, regardless of purchase date. Therefore, its COGS will typically fall between the COGS calculated under FIFO (which assumes older, cheaper goods are sold first) and LIFO (which assumes newer, more expensive goods are sold first).
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Companies using LIFO will report the smallest cost of goods sold: This statement is incorrect. In a rising cost environment, the Last-In, First-Out (LIFO) method assumes that the most recently purchased goods are the first to be sold. Therefore, the costs of the newer, more expensive goods are recorded in COGS, resulting in a higher COGS and a lower gross profit and net income.
Similar Questions
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