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In a period of rising prices, which inventory method typically results in higher
In a period of rising prices, which inventory method typically results in higher net income?
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Q1
In a period of rising prices, which inventory method typically results in higher net income?
FIFO
LIFO
Weighted Average
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FIFO results in lower cost of goods sold and higher net income during periods of rising prices.
Questions & Step-by-step Solutions
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Q
Q: In a period of rising prices, which inventory method typically results in higher net income?
Solution:
FIFO results in lower cost of goods sold and higher net income during periods of rising prices.
Steps: 5
Show Steps
Step 1: Understand that FIFO stands for 'First In, First Out'. This means that the oldest inventory items are sold first.
Step 2: Recognize that in a period of rising prices, the older inventory costs are lower than the newer inventory costs.
Step 3: When using FIFO, the cost of goods sold (COGS) will be based on these lower costs of the older inventory.
Step 4: Since COGS is lower, this means that the remaining income (revenue minus COGS) will be higher.
Step 5: Higher income after subtracting COGS leads to a higher net income.
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