TNM Inc. uses LIFO and was founded in on January 1, 2017. At the end of 2017, TNM disclosed that the LIFO reserve was $1 million, indicating that the ending inventory balance would have been $1 million higher under FIFO. At the end of 2018, the LIFO reserve decreased to $0.5 million and inventory balances were relatively stable compared to 2017. Which of the following is true regarding TNM's costs?
A) Costs have been increasing since TNM was founded because the LIFO reserve is greater than zero.
B) Costs have been decreasing since TNM was founded because the LIFO reserve is greater than zero.
C) Costs were increasing in 2018, but decreasing in 2017.
D) Costs were decreasing in 2018, but increasing in 2017.

Question

Quizplus · Accepted Answer

TNM's LIFO reserve decreasing from $1 million to $0.5 million indicates that the difference between the LIFO and FIFO inventory values decreased, implying that the cost of goods sold (COGS) experienced an increase in 2018 compared to 2017. This, in turn, implies that costs were decreasing in 2018 (as COGS includes cost changes). However, as the LIFO reserve was higher in 2017 than in 2018, it suggests that costs were increasing in 2017 compared to previous years. Therefore, option D is the correct answer.

TNM Inc Uses LIFO and Was Founded in on January 1