assuming purchase costs are rising, determine which of the statements below are correct regarding the cost…

assuming purchase costs are rising, determine which of the statements below are correct regarding the cost of goods sold under fifo, lifo and weighted average cost flow methods. (check all that apply.)\ncompanies using fifo will report the highest gross profit and net income.\ncompanies using fifo will report the smallest cost of goods sold.\nweighted average cost of goods sold will be between fifo and lifo costs of goods sold\ncompanies using lifo will report the smallest cost of goods sold\ncompanies using fifo will pay higher taxes than companies using lifo, assuming all else being equal

assuming purchase costs are rising, determine which of the statements below are correct regarding the cost of goods sold under fifo, lifo and weighted average cost flow methods. (check all that apply.)\ncompanies using fifo will report the highest gross profit and net income.\ncompanies using fifo will report the smallest cost of goods sold.\nweighted average cost of goods sold will be between fifo and lifo costs of goods sold\ncompanies using lifo will report the smallest cost of goods sold\ncompanies using fifo will pay higher taxes than companies using lifo, assuming all else being equal

Answer

Brief Explanations:

  • FIFO (First - In, First - Out): When purchase costs are rising, under FIFO, the oldest (and lower - cost) inventory items are sold first. So, the cost of goods sold (COGS) is lower. Since gross profit = Sales - COGS and net income is calculated after deducting COGS (among other expenses) from sales, a lower COGS leads to higher gross profit and net income. Also, higher net income means higher taxable income (assuming all else equal), so companies using FIFO will pay higher taxes than those using LIFO.
  • LIFO (Last - In, First - Out): When costs are rising, under LIFO, the newest (and higher - cost) inventory items are sold first. So, LIFO has a higher COGS compared to FIFO.
  • Weighted - average cost: The weighted - average cost method calculates the cost of goods sold as an average of the costs of all inventory items available for sale. So, when costs are rising, the weighted - average cost of goods sold will be between the FIFO (lower COGS) and LIFO (higher COGS) cost of goods sold.

Answer:

  • Companies using FIFO will report the highest gross profit and net income.
  • Companies using FIFO will report the smallest cost of goods sold.
  • Weighted average cost of goods sold will be between FIFO and LIFO costs of goods sold.
  • Companies using FIFO will pay higher taxes than companies using LIFO, assuming all else being equal.