Which of the following is/are true in an inflationary environment?
I. For income statement purposes, LIFO is preferable to FIFO.
II. For balance sheet purposes, LIFO is preferable to FIFO.
III. The weighted average cost method provides a better balance sheet representation than LIFO.
IV. The weighted average cost method provides a better income statement representation than FIFO.
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A. B. C. D.Explanation
Remember that for income statement, it is desirable to have the COGS as close to true, current cost, as possible. For balance sheet, the assets must be as close to current, market value, as possible. Hence, for income statement, LIFO preferred to average cost preferred to FIFO. For balance sheet, FIFO preferred to average cost preferred to LIFO.