If a company uses FIFO and the cost of inventory is rising, how will this affect the cost of goods sold?
Practice Questions
1 question
Q1
If a company uses FIFO and the cost of inventory is rising, how will this affect the cost of goods sold?
Increase
Decrease
Remain the same
Cannot be determined
Under FIFO, older, cheaper costs are used for cost of goods sold, leading to a lower cost of goods sold when prices are rising.
Questions & Step-by-step Solutions
1 item
Q
Q: If a company uses FIFO and the cost of inventory is rising, how will this affect the cost of goods sold?
Solution: Under FIFO, older, cheaper costs are used for cost of goods sold, leading to a lower cost of goods sold when prices are rising.
Steps: 5
Step 1: Understand what FIFO means. FIFO stands for 'First In, First Out'. This means that the oldest inventory items are sold first.
Step 2: Recognize that when the cost of inventory is rising, the older inventory costs are lower than the newer inventory costs.
Step 3: When a company sells its products using FIFO, it records the cost of the older, cheaper inventory as the cost of goods sold (COGS).
Step 4: Since the older inventory costs are lower, the total cost of goods sold will also be lower.
Step 5: Conclude that if a company uses FIFO and the cost of inventory is rising, the cost of goods sold will be lower than if they used a different method.
