Which method would show a higher ending inventory value in times of deflation?

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Question: Which method would show a higher ending inventory value in times of deflation?

Options:

Correct Answer: FIFO

Solution:

FIFO would show a higher ending inventory value in times of deflation because it uses the cost of older, cheaper inventory.

Which method would show a higher ending inventory value in times of deflation?

Which method would show a higher ending inventory value in times of deflation?

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: Know what deflation is. Deflation is when prices of goods decrease over time.
Step 3: Recognize how inventory costs work. In FIFO, the cost of the oldest inventory is used to calculate the ending inventory value.
Step 4: In times of deflation, older inventory costs are lower because prices have dropped.
Step 5: Since FIFO uses these older, cheaper costs, it results in a higher ending inventory value compared to other methods like LIFO (Last In, First Out), which would use the newer, more expensive costs.

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