Analysis of Inventories - 32.b

Question 1

What will happen during inflationary periods with stable/increasing inventory quantities

Answer 1

LIFO COGS > FIFO COGS - the last units purchased would have a higher cost than the first units purchased
LIFO - More costs last units purchased are assumed to be the first unit sold - higher COGS.

Question 2

What happens in deflationary periods

Answer 2

LIFO COGS < FIFO COGS
LIFO ending inventory will be higher

Question 3

What is Lifo Liquidation

Answer 3

When a LIFO firm’s inventory quanities decline - so lower costs are included in COGS compared to a situation in which inventory quantities are not declining

Question 4

What can LIFO liquidation result in?

Answer 4

LIFO Liquidation can result in higher profit margins, and higher income tax compared to what would happen if inventory quantities were not declining