TNM Inc. uses LIFO and was founded in on January 1, 2020. At the end of 2020, TNM disclosed that the LIFO reserve was $1 million, indicating that the ending inventory balance would have been $1 million higher under FIFO. At the end of 2021, the LIFO reserve decreased to $0.5 million and inventory balances were relatively stable compared to 2020. Which of the following is false regarding TNM's costs? A. Costs have been increasing since TNM was founded because the LIFO reserve is greater than zero.
B. Costs have been decreasing since TNM was founded because the LIFO reserve is greater than zero.
C. Costs were increasing in 2021, but decreasing in 2020.
D. Costs were decreasing in 2021, but increasing in 2020.

D. Costs were decreasing in 2021, but increasing in 2020.

Explanation:

Change in LIFO reserve balance is used an adjustment to cost of goods sold.

When the LIFO Reserve balance in the current year is higher than the LIFO Reserve balance in the previous, the difference is added to the cost of goods sold. This implies that costs were increasing in the current year, but decreasing in the previous year.

When the LIFO Reserve balance in the current year is lower than the LIFO Reserve balance in the previous, the difference is deducted from the cost of goods sold. This implies that costs were decreasing in the current year, but increasing in the previous year.

In this question, since LIFO Reserve balance of $0.5 million in 2021 is lower than the LIFO Reserve balance of $1 million in 2020, the difference of $0.5 million will be deducted from the costs of goods sold and this implies that Costs were decreasing in 2021, but increasing in 2020.

Therefore, the correct option is D. Costs were decreasing in 2021, but increasing in 2020.

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