honeycfa

Which of the following statements about inventory accounting is least accurate?

A) If a U.S. firm uses last in, first out (LIFO) for tax reporting it must use LIFO for financial reporting.

B) During periods of rising prices, first in, first out (FIFO) based current ratios will be smaller than last in, first out (LIFO) based current ratios.

C) During periods of rising prices, last in, first out (LIFO) income will be lower than under first in, first out (FIFO) but cash flows will be higher.

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During periods of rising prices, FIFO based current ratios will be larger than LIFO based current ratios because the more expensive units (last purchases) are assigned to ending inventory, resulting in greater current assets.

honeycfa

Blocher Company is evaluating the following methods of accounting for depreciation of long-lived assets and inventory:

• Depreciation: straight-line; double-declining balance (DDB)
• Inventory: first in, first out (FIFO); last in, first out (LIFO)

Assuming a deflationary environment (prices are falling), which of the following combinations will result in the highest net income in year 1?

A) Straight-line; LIFO.

B) DDB; FIFO.

C) Straight-line; FIFO.

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For year 1, straight-line depreciation will be lower than DDB. During deflationary periods, LIFO will result in lower cost of goods sold and hence higher income.

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