Under which method would the cost of goods sold be higher in a period of rising prices?
Practice Questions
1 question
Q1
Under which method would the cost of goods sold be higher in a period of rising prices?
FIFO
LIFO
Weighted Average
None of the above
Under LIFO, the cost of goods sold would be higher in a period of rising prices because the latest, more expensive inventory is used first.
Questions & Step-by-step Solutions
1 item
Q
Q: Under which method would the cost of goods sold be higher in a period of rising prices?
Solution: Under LIFO, the cost of goods sold would be higher in a period of rising prices because the latest, more expensive inventory is used first.
Steps: 5
Step 1: Understand that LIFO stands for 'Last In, First Out'. This means that the most recently purchased items are sold first.
Step 2: Recognize that in a period of rising prices, the latest inventory costs more than the older inventory.
Step 3: When using LIFO, the cost of goods sold (COGS) will include these higher costs from the latest inventory.
Step 4: Compare this to FIFO (First In, First Out), where older, cheaper inventory costs are used first, resulting in lower COGS.
Step 5: Conclude that under LIFO, the cost of goods sold is higher during rising prices because it reflects the cost of the newest, more expensive inventory.
