Question

In periods with rising prices and increasing quantities of inventories, which of the following relationships among inventory valuation methods is generally correct? O FIFO has a higher inventory balance and a lower net income than LIFO. O FIFO has a higher inventory balance and a higher net income than LIFO. OLIFO has a higher inventory balance and a higher net income than FIFO. OLIFO has a higher inventory balance and a lower net income than FIFO. All of the following would qualify a lease as a capital lease except: The lease term is 80% of the asset's estimated useful life. O The lease agreement contains a bargain purchase option. The present value of the lease payments equals 70% of the fair market value of the leased asset. Title to the leased asset transfers to the lessee at the end of the lease term.

Answer 1

In FIFO Method, the inventory bought first are assumed to be sold first. While in the case of LIFO, the inventory that is bought in latest time period is assumed to be sold first.

Hence, in the case of rising prices, FIFO will have a higher inventory balance as it would have sold all the inventory that was purchased at lower prices and all the latest inventory with higher purchases price would be left in the inventory. The inventory that would have been sold would have a lower purchase price, hence lower expense being recorded on sale, which will cause a higher net income than LIFO. LIFO would have a lower inventory balance as all the old inventory purchased would be left as well inventory that has been sold would be the one that was bought at higher purchase price, which means a higher amount of expense incurred causing lower net income than FIFO.

Correct Option is Second Option.