The use of LIFO rather than FIFO for inventory costing under normal economic conditions results in:

I. lower net income.
II. higher total assets.
III. higher retained earnings.
IV. unchanged retained earnings.

A)II and III
B)I, II, and IV
C)I only
D)I and IV

Question

The use of LIFO rather than FIFO for inventory costing under normal economic conditions results in:

I. lower net income.
II. higher total assets.
III. higher retained earnings.
IV. unchanged retained earnings.

A)II and III
B)I, II, and IV
C)I only
D)I and IV

Quizplus · Accepted Answer

Under normal economic conditions, the use of LIFO rather than FIFO for inventory costing results in lower net income due to the higher cost of goods sold associated with the LIFO method. This, in turn, leads to lower retained earnings, contradicting statement III. Total assets may be higher under LIFO due to the higher inventory value, but this is not guaranteed and does not contradict the fact that net income and retained earnings will be lower. Therefore, statement II is not true, and statement IV remains unchanged.

The Use of LIFO Rather Than FIFO for Inventory Costing