If a company changes from LIFO to FIFO, how would that impact its financial statements?
The answer says that assuming costs are increasing, LIFO to FIFO will increase COGS and thereby decrease Net Income. It will also reduce taxes and inventory.
However, my understanding is LIFO (high COGS) to FIFO (low COGS) decrease COGS and thereby increase Net Income. Please advise!
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If costs are increasing, switching from LIFO to FIFO means that your inventory sold will now consist of the inventory that was least recently purchased. Since the least recently purchased inventory is cheaper (assuming an inflationary environment), the FIFO COGS will be lower. As a result, net income will be higher.
The answer you have been provided is either wrong, or you are omitting an important detail. Out of curiosity, did you find this question on the CFA Institute website's question bank for Level 1-2? If yes, some of the questions do have typos and/or errors either in the question or in the answer. You can often spot these errors by looking at comments written by other CFA candidates right underneath the question.
You are assuming that inventory costs are increasing, which may not be the case.
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