In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.
In an inflationary period, i.e., a period where prices are consistently rising, FIFO will produce the highest amount of income. This is true because the items purchased first (and at the lowest cost) are the items that are deemed sold first whose cost is charged to expense. The highest cost items remain in the asset account inventory. Since the lowest cost items have been expensed, net income will be higher than it would be assuming a LIFO flow.
More Questions Accounting Chapter 5:
- What is the difference between the flow of costs and the physical flow of goods?
- In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.
- In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.
- What are some advantages and disadvantages of using the FIFO method of inventory valuation?
- What are some advantages and disadvantages of the specific identification method of accounting for inventory?
- What is the effect on the accounting equation of recognizing uncollectable accounts expense?
- What is the net realizable value of receivables?
- What is the difference between accounts receivable and notes receivable?