The choice of inventory cost flow assumptions (such as FIFO, LIFO, or weighted average) affects which of the following amounts on the financial statements?

• A. Cost of Goods Sold and Net Income
• B. Accounts Receivable and Sales Revenue
• C. Cash and Common Stock
• D. Dividends and Retained Earnings

Answer: (A)

Verified step by step guidance

1. Understand the concept of inventory cost flow assumptions: FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average are methods used to determine the cost of inventory sold and the value of ending inventory. These methods impact financial statement amounts.
2. Recognize that Cost of Goods Sold (COGS) is directly affected by the inventory cost flow assumption chosen. For example, under FIFO, older (lower-cost) inventory is sold first, which may result in lower COGS during periods of rising prices. Under LIFO, newer (higher-cost) inventory is sold first, leading to higher COGS in the same scenario.
3. Understand the relationship between COGS and Net Income: Net Income is calculated as Revenue minus Expenses, where COGS is a major expense. A higher COGS reduces Net Income, while a lower COGS increases Net Income. Therefore, the inventory cost flow assumption indirectly affects Net Income.
4. Analyze why other financial statement items like Accounts Receivable, Sales Revenue, Cash, Common Stock, Dividends, and Retained Earnings are not directly impacted by inventory cost flow assumptions. These items are influenced by other transactions and decisions, not the method used to account for inventory costs.
5. Conclude that the correct answer is 'Cost of Goods Sold and Net Income,' as these are the amounts directly affected by the choice of inventory cost flow assumptions.