Which statement about inventory methods under GAAP and IFRS is true?

Which statement about inventory methods under GAAP and IFRS is true?

• A. Under GAAP, choosing LIFO generally increases COGS and lowers profits in inflationary environments
• B. LIFO is the only inventory method allowed under IFRS
• C. GAAP does not allow LIFO for any company
• D. LIFO always results in higher profits than FIFO in all scenarios

Answer: (A)

The main idea here is how the choice of inventory accounting method affects cost of goods sold and profits, and how this interacts with the rules of GAAP versus IFRS. Under US GAAP, LIFO is allowed. When prices are rising, the LIFO method assigns the most recent, higher costs to cost of goods sold, which increases COGS and reduces gross and net profits. The older, lower-cost layers stay in ending inventory, which also tends to keep reported asset values lower than other methods. This is why the statement that LIFO generally increases COGS and lowers profits in inflationary environments is correct. IFRS, by contrast, does not permit LIFO; it requires FIFO or a weighted-average method. That makes the claim about LIFO being the only method under IFRS false, and it also explains why other choices are incorrect. LIFO does not always produce higher profits; in inflationary periods it tends to lower profits, and in other scenarios it can do the opposite, so the statement that it always yields higher profits is not true.

The main idea here is how the choice of inventory accounting method affects cost of goods sold and profits, and how this interacts with the rules of GAAP versus IFRS. Under US GAAP, LIFO is allowed. When prices are rising, the LIFO method assigns the most recent, higher costs to cost of goods sold, which increases COGS and reduces gross and net profits. The older, lower-cost layers stay in ending inventory, which also tends to keep reported asset values lower than other methods. This is why the statement that LIFO generally increases COGS and lowers profits in inflationary environments is correct.

IFRS, by contrast, does not permit LIFO; it requires FIFO or a weighted-average method. That makes the claim about LIFO being the only method under IFRS false, and it also explains why other choices are incorrect. LIFO does not always produce higher profits; in inflationary periods it tends to lower profits, and in other scenarios it can do the opposite, so the statement that it always yields higher profits is not true.