US CMA Part 2 · Chapter 2 · Question 12 of 15
During a period of steadily rising purchase prices and stable inventory quantities, a US company using LIFO, compared with an otherwise identical company using FIFO, will report:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Lower gross profit and a lower inventory balance
Explanation
Under LIFO the most recent (higher) costs flow to cost of goods sold, so cost of goods sold is higher and gross profit lower than under FIFO. The older, lower costs remain in ending inventory, so the balance sheet inventory is lower. Analysts often adjust using the LIFO reserve to compare LIFO and FIFO companies.
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