Starfish Company (a company using U.S. GAAP and LIFO inventory method) is considering changing to IFRS and the FIFO inventory method. How would a comparison of these methods affect Starfish's financials?
A) During a period of inflation, the current ratio would decrease when IFRS and the FIFO inventory method are used as compared to U.S. GAAP and LIFO.
B) During a period of inflation, the taxes will decrease when IFRS and the FIFO inventory method are used as compared to U.S. GAAP and LIFO.
C) During a period of inflation, net income would be greater if IFRS and the FIFO inventory method are used as compared to U.S.GAAP and LIFO.
D) During a period of inflation, working capital would decrease when IFRS and the FIFO inventory method are used as compared to U.S. GAAP and LIFO.

Question

Quizplus · Accepted Answer

IFRS and the FIFO inventory method generally result in higher net income during a period of inflation compared to U.S. GAAP and LIFO. This is because FIFO assumes that the inventory sold is the oldest inventory, which typically has a lower cost than more recently purchased inventory. Therefore, when prices are rising, using FIFO results in lower cost of goods sold, higher gross profit and higher net income. The other options are not necessarily affected by the change in inventory method and do not show a consistent trend during a period of inflation.

Starfish Company (A Company Using U