Under which method would the cost of goods sold be higher in a period of rising

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Question: Under which method would the cost of goods sold be higher in a period of rising prices?

Options:

Correct Answer: LIFO

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.

Under which method would the cost of goods sold be higher in a period of rising prices?

Under which method would the cost of goods sold be higher in a period of rising prices?

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.

LIFO vs. FIFO – LIFO (Last In, First Out) assumes that the most recently purchased items are sold first, which results in higher cost of goods sold during inflation.
Impact of Inflation on Inventory Valuation – In periods of rising prices, the method of inventory valuation affects financial statements, particularly the cost of goods sold and net income.