Question

w 9 plete the following table, which compares the effects of LIFO. FIFO, and weighted average or casting methods on the financial statements in periods of declining eventory conta we should be lowest, highest, or middle 4 points Weighted Financial Statement Element: Cast of Goods Sold Net Income Ending Merchandise Inventory 6) For each of the following business transactions list two examples of related accounting information system (AIS) activities: 6 points Accounting Information System Activities Business Transactions Sell merchandise inventory Purchase of goods or services Payroll

Answer 1

Under FIFO method, closing inventory would include the value of inventory purchased the most recently. While under the LIFO method, closing inventory would contain the value of inventory purchased earlier.

Hence when the value of inventory is declining, i.e. the inventory purchased at a later date will have a lower value, the closing inventory under FIFO will be of a lower value compared to LIFO. While the value under weighted average method being in the middle.

Similarly, lower closing inventory = lower net income. net income under FIFO will be lower compared to LIFO method. While the value under weighted average method being in the middle.

Now, COGS = opening stock + purchase - closing inventory, Thus, lower closing inventory will be equivalent to a higher COGS. Hence, FIFO method will have a higher COGS compared to LIFO method.

While the value under weighted average method being in the middle.

1. Cost of goods sold: Lowest, Highest, Middle

2. Net Income: Highest, Lowest, middle

3. Closing Stock: Highest, Lowest, middle

for LIFO, FIFO and Weighted average cost respectively