Which of the following statements about the FIFO cost assumption is true?
A)The same costs per unit are assigned to the ending inventory and the cost of goods sold.
B)Companies prefer to use FIFO because it lowers their tax liability.
C)In times of rising prices FIFO will produce a higher net income than moving average.
D)In time of rising prices FIFO produces an inventory cost per unit that is lower than the cost per unit of cost of goods sold.

Question

Quizplus · Accepted Answer

In times of rising prices, FIFO will produce a higher net income than moving average because the oldest and lowest-cost items are sold first, leaving the most recent and higher-cost items in inventory, which increases the value of the inventory on the balance sheet. Option A is incorrect because the costs per unit assigned to the ending inventory and the cost of goods sold are not the same, as the ending inventory is based on the most recent and higher-cost items while the cost of goods sold is based on the oldest and lower-cost items. Option B is incorrect because tax liability is not directly affected by the choice of cost assumption method. Option D is incorrect because in times of rising prices, FIFO produces an inventory cost per unit that is higher than the cost per unit of cost of goods sold.

Which of the Following Statements About the FIFO Cost Assumption