1.
Explain the effect each cost flow (FIFO, LIFO) method would have on profit in rising and falling
prices, and why..
Solution
FIFO Method Under FIFO method goods which are bought first are sold first FIFO gives a more
accurate value for ending inventory on the balance sheet. On the other hand,during inflation
FIFO increases net income and increased net income can increase taxes owed. But during
deflation FIFO shows less income as latest inventory value would be less during deflation LIFO
Method Under LIFO method goods which are bought last is sold first LIFO gives less accurate
value for ending inventory on the balance sheet.During inflation LIFO decreases net income and
decreased net income can decrease taxes owed. But during deflation LIFO shows more income
as earlier inventory value would be more during deflation