Under LIFO, how are the cost of goods sold (COGS) affected during inflation?

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Question: Under LIFO, how are the cost of goods sold (COGS) affected during inflation?

Options:

Correct Answer: COGS increases

Solution:

Under LIFO, COGS increases during inflation because the most recently purchased, higher-cost inventory is sold first.

Under LIFO, how are the cost of goods sold (COGS) affected during inflation?

Under LIFO, how are the cost of goods sold (COGS) affected during inflation?

Step 1: Understand what LIFO means. LIFO stands for 'Last In, First Out'. This means that the last items you bought are the first ones you sell.
Step 2: Know what COGS means. COGS stands for 'Cost of Goods Sold'. It is the total cost of the products that a company sells during a specific period.
Step 3: Recognize what inflation is. Inflation means that prices are rising over time, so new inventory costs more than older inventory.
Step 4: Connect LIFO and inflation. Under LIFO, when prices are rising (inflation), the most recently purchased inventory (which is more expensive) is sold first.
Step 5: Determine the effect on COGS. Since the higher-cost inventory is sold first under LIFO during inflation, the COGS will be higher.

LIFO (Last In, First Out) – An inventory valuation method where the most recently acquired items are sold first, affecting COGS and net income.
Inflation Impact on Inventory Costs – During inflation, the cost of newer inventory is higher, which increases COGS when using LIFO.