In periods of inflation phantom or paper profits may be reported as a result of using the
A) perpetual inventory method.
B) FIFO costing assumption.
C) LIFO costing assumption.
D) periodic inventory method.

Question

Quizplus · Accepted Answer

During periods of inflation, the FIFO (First-In, First-Out) costing assumption can lead to reporting higher profits. This is because older, lower-cost inventory is used up first, leading to lower COGS (Cost of Goods Sold) and higher reported profits, which may not reflect the current replacement cost of the inventory, thus creating "phantom" or "paper" profits.

In Periods of Inflation Phantom or Paper Profits May Be