Under accrual accounting, which management decision could potentially inflate a company's earnings per share (EPS)?

• A. Switching from FIFO to LIFO if inventory costs are expected to increase, resulting in higher EPS
• B. Switching from LIFO to FIFO if costs are expected to increase, resulting in higher EPS
• C. Switching from FIFO to LIFO if costs are expected to decrease, resulting in higher EPS
• D. Switching from straight-line to accelerated depreciation

Answer: (A)

Inventory accounting method affects reported earnings by altering cost of goods sold, so policy changes can inflate or deflate earnings per share. In an environment where costs are expected to rise, using the FIFO method tends to produce lower COGS than LIFO, which boosts gross profit and, after taxes, net income. That higher net income translates into a higher EPS. Therefore switching from the LIFO system to FIFO when costs are expected to increase would tend to inflate EPS. Conversely, switching from FIFO to LIFO in rising-cost conditions would push COGS higher and reduce EPS. Depreciation method changes can also move earnings, but switching to accelerated depreciation typically lowers near-term earnings, not inflates them. So the move that could inflate EPS is adopting FIFO instead of LIFO when costs are expected to increase.