Which inventory valuation method can lead to lower net income during inflationary periods?

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Q: Which inventory valuation method can lead to lower net income during inflationary periods?

Solution: LIFO results in higher COGS and thus lower net income during inflation, as it accounts for the most recent, higher costs first.

Steps: 7

Step 1: Understand what inventory valuation methods are. These are ways to calculate the value of the goods a company has in stock.
Step 2: Learn about LIFO (Last In, First Out). This method assumes that the most recently purchased items are sold first.
Step 3: Recognize what happens during inflation. Prices of goods increase over time.
Step 4: When using LIFO during inflation, the company sells the newer, more expensive items first.
Step 5: Because the cost of goods sold (COGS) is higher with LIFO, the company's expenses increase.
Step 6: Higher expenses mean lower net income, which is the profit after all costs are deducted.
Step 7: Conclude that LIFO can lead to lower net income during inflationary periods because it accounts for the higher costs first.