Question

A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?

Answer 1

Answer:

Ending Inventory = Decrease

Net Income = Decrease

Explanation:

If the company chooses to go to LIFO inventory systems, the ending inventory will decrease. It is because of the selling the latest purchased items earlier. It will decrease the ending inventory assuming that the latest items are costly.

Again, as the ending inventory decreases, the cost of goods sold becomes higher. As the cost of goods sold tends to be higher, the net income will become decrease automatically.