If a company uses LIFO, what happens to the ending inventory valuation during a

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Question: If a company uses LIFO, what happens to the ending inventory valuation during a period of deflation?

Options:

Correct Answer: Increases

Solution:

Ending inventory valuation increases under LIFO during a period of deflation as older, cheaper costs remain in inventory.

If a company uses LIFO, what happens to the ending inventory valuation during a period of deflation?

If a company uses LIFO, what happens to the ending inventory valuation during a period of deflation?

Step 1: Understand what LIFO means. LIFO stands for 'Last In, First Out', which means the most recently purchased items are sold first.
Step 2: Recognize what deflation is. Deflation is when prices of goods decrease over time.
Step 3: Know how LIFO affects inventory. Under LIFO, the cost of the most recent purchases is used to calculate the cost of goods sold, leaving older, cheaper items in inventory.
Step 4: Consider the impact of deflation on costs. During deflation, the older inventory costs are lower than the recent costs.
Step 5: Conclude that since older, cheaper costs remain in inventory, the ending inventory valuation increases under LIFO during deflation.

LIFO (Last In, First Out) – An inventory valuation method where the most recently purchased items are considered sold first.
Deflation – A decrease in the general price level of goods and services, leading to lower costs for inventory.
Ending Inventory Valuation – The value of the inventory that remains unsold at the end of an accounting period.