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Under LIFO, how is the cost of goods sold (COGS) affected during periods of risi

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Question: Under LIFO, how is the cost of goods sold (COGS) affected during periods of rising prices?

Options:

  1. COGS decreases.
  2. COGS remains the same.
  3. COGS increases.
  4. COGS is not affected.

Correct Answer: COGS increases.

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.

Under LIFO, how is the cost of goods sold (COGS) affected during periods of risi

Practice Questions

Q1
Under LIFO, how is the cost of goods sold (COGS) affected during periods of rising prices?
  1. COGS decreases.
  2. COGS remains the same.
  3. COGS increases.
  4. COGS is not affected.

Questions & Step-by-Step Solutions

Under LIFO, how is the cost of goods sold (COGS) affected during periods of rising prices?
  • 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.
  • LIFO (Last-In, First-Out) – An inventory valuation method where the most recently purchased items are considered sold first.
  • Cost of Goods Sold (COGS) – The direct costs attributable to the production of the goods sold by a company.
  • Inflation – A general increase in prices and fall in the purchasing value of money.
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