Compare the effects of the different costing methods on the financial statements
-In periods of ricing prices, the average cost method generates gross profit, net income, and income tax amounts that fall below the FIFO method.

Question

Quizplus · Accepted Answer

This statement is true. The average cost method calculates the cost of goods sold by dividing the total cost of goods available for sale by the total quantity of goods available for sale. In rising price environments, this method results in a higher cost of goods sold, which lowers gross profit and net income. As a result, income tax amounts will also be lower. In contrast, the FIFO method assumes that the oldest inventory items are sold first, resulting in a higher cost of goods sold when prices are rising, which leads to higher gross profit, net income, and income tax amounts.

Compare the Effects of the Different Costing Methods on the Financial