All other things being equal, if a LIFO liquidation occurs during a period of rising prices, which of the following statements about the effects on a firm's financial statements is generally true?

I. Cost of goods sold increases.
II. Gross profit margin increases.
III. Taxes decrease.
IV. Net income increases.

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

Question

All other things being equal, if a LIFO liquidation occurs during a period of rising prices, which of the following statements about the effects on a firm's financial statements is generally true?

I. Cost of goods sold increases.
II. Gross profit margin increases.
III. Taxes decrease.
IV. Net income increases.

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

Quizplus · Accepted Answer

During a LIFO liquidation in a period of rising prices, older, lower-cost inventory is sold, resulting in a lower cost of goods sold. This leads to higher gross profit margins and higher net income. Taxes would increase, not decrease, due to the higher net income.

All Other Things Being Equal, If a LIFO Liquidation Occurs