Under LIFO, how are the cost of goods sold (COGS) affected during inflation?
Practice Questions
1 question
Q1
Under LIFO, how are the cost of goods sold (COGS) affected during inflation?
COGS increases
COGS decreases
COGS remains the same
COGS is unpredictable
Under LIFO, COGS increases during inflation because the most recently purchased, higher-cost inventory is sold first.
Questions & Step-by-step Solutions
1 item
Q
Q: Under LIFO, how are the cost of goods sold (COGS) affected during inflation?
Solution: Under LIFO, COGS increases during inflation because the most recently purchased, higher-cost inventory is sold first.
Steps: 5
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.
