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Under which inventory valuation method would the cost of goods sold be higher in

Practice Questions

Q1
Under which inventory valuation method would the cost of goods sold be higher in a period of rising prices?
  1. FIFO
  2. LIFO
  3. Weighted Average
  4. Standard Costing

Questions & Step-by-Step Solutions

Under which inventory valuation method would the cost of goods sold be higher in a period of rising prices?
  • Step 1: Understand what inventory valuation methods are. These are ways to calculate the cost of goods sold (COGS) and the value of inventory.
  • Step 2: Learn about LIFO (Last In, First Out). This method assumes that the most recently purchased items are sold first.
  • Step 3: Recognize that in a period of rising prices, the most recently purchased items (under LIFO) are more expensive.
  • Step 4: Realize that because LIFO uses the cost of the newest items for COGS, the total cost of goods sold will be higher.
  • Step 5: Compare this with FIFO (First In, First Out), where older, cheaper items are sold first, resulting in lower COGS during rising prices.
  • Step 6: Conclude that LIFO leads to higher COGS in a period of rising prices.
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