If a company uses FIFO for inventory valuation, how does it affect the ending inventory during inflation?
Practice Questions
1 question
Q1
If a company uses FIFO for inventory valuation, how does it affect the ending inventory during inflation?
Higher ending inventory
Lower ending inventory
No effect
Depends on sales
FIFO results in a higher ending inventory value during inflation as the most recent costs are not included in COGS.
Questions & Step-by-step Solutions
1 item
Q
Q: If a company uses FIFO for inventory valuation, how does it affect the ending inventory during inflation?
Solution: FIFO results in a higher ending inventory value during inflation as the most recent costs are not included in COGS.
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 what happens during inflation. Inflation means that prices are rising over time.
Step 3: Identify how FIFO affects the cost of goods sold (COGS). Under FIFO, the cost of the oldest inventory (which is cheaper) is used to calculate COGS.
Step 4: Realize that when COGS is lower, it means that the remaining inventory (ending inventory) is valued at the more expensive, recent prices.
Step 5: Conclude that because FIFO uses older costs for COGS, the ending inventory value is higher during inflation.
