Which of the following statements about inventories is true?
A) U.S. generally accepted accounting principles (GAAP) require the use of lower-of-cost or market-valuation basis for inventories.
B) Last-in, last-out (LIFO) inventory accounting makes management of income more difficult than first-in, first-out (FIFO) accounting.
C) During inflation, LIFO inventory accounting tends to overstate the current ratio.
D) FIFO inventory balances generally contain old and outdated costs that have little or no relationship to current costs.

Question

Quizplus · Accepted Answer

U.S. GAAP requires the use of lower-of-cost or market-valuation basis for inventory accounting.

Answer: B 
 LIFO inventory accounting can make management of income more difficult than FIFO accounting.

Answer: C 
 During inflation, LIFO inventory accounting tends to overstate the cost of goods sold (COGS) and lower the gross profit, which in turn can reduce the current ratio.

Answer: D 
 FIFO inventory accounting assumes that items purchased first are sold first; therefore, the ending inventory balances contain more recent costs that are more relevant to the current period than LIFO inventory balances.

Which of the Following Statements About Inventories Is True