Which method would likely show a higher ending inventory value in a deflationary

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Question: Which method would likely show a higher ending inventory value in a deflationary environment?

Options:

Correct Answer: FIFO

Solution:

In a deflationary environment, FIFO would likely show a higher ending inventory value as it uses the most recent, lower costs.

Which method would likely show a higher ending inventory value in a deflationary environment?

Which method would likely show a higher ending inventory value in a deflationary environment?

Step 1: Understand what FIFO means. FIFO stands for 'First In, First Out'. This means that the oldest inventory costs are used up first when calculating costs.
Step 2: Know what a deflationary environment is. In a deflationary environment, prices of goods are decreasing over time.
Step 3: Recognize how inventory valuation works. When calculating ending inventory, the method used can affect the value reported on financial statements.
Step 4: Compare FIFO and LIFO. LIFO stands for 'Last In, First Out', which means the most recent inventory costs are used first.
Step 5: In a deflationary environment, FIFO will use the most recent, lower costs for inventory valuation, leading to a higher ending inventory value.
Step 6: Conclude that in a deflationary environment, FIFO is likely to show a higher ending inventory value compared to LIFO.

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