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In a period of rising prices, which inventory method typically results in higher

Practice Questions

Q1
In a period of rising prices, which inventory method typically results in higher net income?
  1. FIFO
  2. LIFO
  3. Weighted Average
  4. Specific Identification

Questions & Step-by-Step Solutions

In a period of rising prices, which inventory method typically results in higher net income?
  • 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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