Q. A company using the last-in, first-out (LIFO) inventory method reports a year-end LIFO reserve of $85,000, which is $20,000 lower than the prior year. If the company had used first-in, first-out (FIFO) instead of LIFO in that year, its financial statements would most likely have reported:
- a higher cost of goods sold (COGS) but a lower inventory balance.
- both a higher cost of goods sold (COGS) and a higher inventory balance.
- a lower cost of goods sold (COGS) but a higher inventory balance.
Solution
B is correct.
FIFO COGS = LIFO COGS − Change in LIFO reserve
The negative change in the LIFO reserve would increase the COGS under FIFO compared with LIFO.FIFO inventory = LIFO inventory + LIFO reserve
The LIFO reserve has a positive balance so that FIFO inventory would be higher than LIFO inventory.
