Given selected operating data for two divisions of Outback Brewing, Ltd., which of the following statements best describes how the choice between FIFO and LIFO inventory costing methods can affect the financial statements during a period of rising prices?

• A. FIFO will result in higher net income and higher ending inventory values compared to LIFO.
• B. LIFO will result in higher ending inventory values but lower net income compared to FIFO.
• C. LIFO will result in higher net income and higher ending inventory values compared to FIFO.
• D. FIFO and LIFO will produce the same net income and ending inventory values.

Answer: (A)

Verified step by step guidance

1. Understand the key concepts of FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) inventory costing methods. FIFO assumes that the oldest inventory items are sold first, while LIFO assumes that the newest inventory items are sold first.
2. Consider the impact of rising prices on inventory costs. Under FIFO, the cost of goods sold (COGS) will reflect older, lower costs, while ending inventory will reflect newer, higher costs. This typically results in higher net income and higher ending inventory values during periods of rising prices.
3. Under LIFO, the cost of goods sold (COGS) will reflect newer, higher costs, while ending inventory will reflect older, lower costs. This typically results in lower net income and lower ending inventory values during periods of rising prices.
4. Analyze the financial statement implications: Higher net income under FIFO can lead to higher taxes, while lower net income under LIFO can reduce tax liability. Ending inventory values also affect the balance sheet, with FIFO showing higher values during rising prices.
5. Compare the given statements to the analysis above. The correct statement is: 'FIFO will result in higher net income and higher ending inventory values compared to LIFO,' as this aligns with the effects of rising prices on inventory costing methods.