Which of the following is directly impacted by the selected inventory costing method (e.g., FIFO, LIFO, or Weighted Average) in financial statements?

• A. Accounts Receivable and Sales Revenue
• B. Depreciation Expense
• C. Cash Flows from Financing Activities
• D. Cost of Goods Sold and Net Income

Answer: (D)

Verified step by step guidance

1. Understand the inventory costing methods: FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average. These methods determine how inventory costs are allocated to Cost of Goods Sold (COGS) and ending inventory.
2. Recognize that the choice of inventory costing method directly impacts the Cost of Goods Sold (COGS) reported on the income statement. For example, under FIFO, older inventory costs are used for COGS, while under LIFO, newer inventory costs are used.
3. Understand that changes in COGS affect Net Income. Since Net Income is calculated as Revenue minus Expenses (including COGS), a higher COGS will reduce Net Income, while a lower COGS will increase Net Income.
4. Note that Accounts Receivable, Sales Revenue, Depreciation Expense, and Cash Flows from Financing Activities are not directly impacted by the inventory costing method. These items are influenced by other factors unrelated to inventory valuation.
5. Conclude that the selected inventory costing method primarily impacts Cost of Goods Sold and Net Income, as these are directly tied to how inventory costs are allocated in financial statements.