1
Q
Income statement effect:
A
When prices rising, FIFO produces higher profit
When prices falling, opposite is true
2
Q
Balance sheet effect:
A
FIFO provides the most current valuation of inventory
3
Q
Cost formula should be used consistently
A
- Enhances comparability of statements over time
- Choose the method that best corresponds with actual physical flow
4
Q
INVENTORY ERRORS
A
Errors in inventory affect both income statement and balance sheet
- Through the calculation of cost of goods sold
- An error could affect COGS and net income
5
Q
Ending inventory
A
- Ending inventory of one period becomes beginning inventory of the next period
- Errors in ending inventory carry over to the following period
6
Q
BALANCE SHEET ERRORS
A
Effect can be determined by using the basic accounting equation:
Assets = Liabilities + Owner’s Equity
An error in ending inventory in one period will cause an error in beginning inventory in the next period
