Under LIFO, how is the cost of goods sold (COGS) affected during periods of rising prices?
Practice Questions
1 question
Q1
Under LIFO, how is the cost of goods sold (COGS) affected during periods of rising prices?
COGS decreases.
COGS remains the same.
COGS increases.
COGS is not affected.
LIFO (Last-In, First-Out) results in higher COGS during inflation, as the most recently purchased (and typically more expensive) inventory is considered sold first.
Questions & Step-by-step Solutions
1 item
Q
Q: Under LIFO, how is the cost of goods sold (COGS) affected during periods of rising prices?
Solution: LIFO (Last-In, First-Out) results in higher COGS during inflation, as the most recently purchased (and typically more expensive) inventory is considered sold first.
Steps: 5
Step 1: Understand what LIFO means. LIFO stands for Last-In, First-Out, which means the last items added to inventory are the first ones sold.
Step 2: Recognize what happens during rising prices. When prices are rising, the most recently purchased items are more expensive than older items.
Step 3: Identify how COGS is calculated under LIFO. Under LIFO, the cost of goods sold (COGS) is based on the cost of the most recently purchased inventory.
Step 4: Connect rising prices to COGS. Since the most recently purchased items are more expensive during inflation, COGS will be higher.
Step 5: Conclude that during periods of rising prices, LIFO results in higher COGS because it uses the cost of the latest, more expensive inventory first.
