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Question:

Consider the following statements:
Statement 1: In the first year of a company’s operations, FIFO and LIFO will result in the same amount for cost of goods available for sale if prices have been declining over the year.
Statement 2: In a period of falling prices, use of LIFO will enable a firm to retain more cash.
Which of the following is most likely?

A Only Statement 2 is incorrect.
Explaination

• Cost of goods available for sale is the sum of opening inventory and purchases. In the first year of a company’s operations, the inventory cost flow assumption has no impact on the amount recognized as cost of goods available for sale.
• In a period of falling prices, use of LIFO will result in lower COGS, higher net income, higher taxes, and lower cash.