In a period of increasing prices, which of the following inventory methods generally results in the lowest value of COGS? a. Average cost method. b. LIFO method. c. Need more information to answer. d. FIFO method.
Question
In a period of increasing prices, which of the following inventory methods generally results in the lowest value of COGS?
a. Average cost method.
b. LIFO method.
c. Need more information to answer.
d. FIFO method.
Solution
The answer is d. FIFO method.
Here's why:
In a period of increasing prices, the FIFO (First-In, First-Out) method assumes that the oldest inventory items are sold first. Therefore, the cost of goods sold (COGS) is based on the cost of the older, cheaper items, resulting in a lower COGS compared to other inventory methods.
On the other hand, the LIFO (Last-In, First-Out) method assumes that the newest inventory items are sold first. Therefore, the COGS is based on the cost of the newer, more expensive items, resulting in a higher COGS.
The average cost method falls somewhere in between, as it averages out the cost of all inventory items, regardless of when they were purchased.
So, in a period of increasing prices, the FIFO method generally results in the lowest value of COGS.
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