Which is the best descirbe of the effect of using different inventory method during of the period of rising price, a Using the Last-In, First-Out (LIFO) method will result in higher ending inventory and higher cost of goods sold, thereby showing higher gross profit compared to the First-In, First-Out (FIFO) method. b Using the First-In, First-Out (FIFO) method will result in lower ending inventory and higher cost of goods sold, thereby showing lower gross profit compared to the Last-In, First-Out (LIFO) method. c Using the First-In, First-Out (FIFO) method will result in higher ending inventory and lower cost of goods sold, thereby showing higher gross profit compared to the Last-In, First-Out (LIFO) method. d Using the Weighted Average Cost (WAC) method will always yield the same ending inventory and cost of goods sold figures irrespective of whether prices are rising or falling.
Question
Which is the best descirbe of the effect of using different inventory method during of the period of rising price, a Using the Last-In, First-Out (LIFO) method will result in higher ending inventory and higher cost of goods sold, thereby showing higher gross profit compared to the First-In, First-Out (FIFO) method.
b Using the First-In, First-Out (FIFO) method will result in lower ending inventory and higher cost of goods sold, thereby showing lower gross profit compared to the Last-In, First-Out (LIFO) method.
c Using the First-In, First-Out (FIFO) method will result in higher ending inventory and lower cost of goods sold, thereby showing higher gross profit compared to the Last-In, First-Out (LIFO) method.
d Using the Weighted Average Cost (WAC) method will always yield the same ending inventory and cost of goods sold figures irrespective of whether prices are rising or falling.
Solution
The correct answer is c. Using the First-In, First-Out (FIFO) method will result in higher ending inventory and lower cost of goods sold, thereby showing higher gross profit compared to the Last-In, First-Out (LIFO) method.
Here's why:
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In a period of rising prices, the FIFO method assumes that the items of inventory that were purchased or produced first are sold first. Therefore, the cost of the older inventory, which is lower, is recognized in the cost of goods sold (COGS), while the cost of the newer inventory, which is higher, is included in the ending inventory.
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This results in a lower COGS and a higher ending inventory, which in turn leads to a higher gross profit.
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On the other hand, the LIFO method assumes that the items of inventory that were purchased or produced last are sold first. Therefore, the cost of the newer inventory, which is higher, is recognized in the COGS, while the cost of the older inventory, which is lower, is included in the ending inventory.
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This results in a higher COGS and a lower ending inventory, which in turn leads to a lower gross profit.
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The Weighted Average Cost (WAC) method averages out the cost of all the items of inventory, regardless of when they were purchased or produced. Therefore, it does not have the same effect as the FIFO or LIFO methods during a period of rising prices.
Similar Questions
Which of the following statements is correct regarding the use of the first-in first-out (FIFO) method of valuing inventory? A. Cost of sales for the period is calculated using the most recent inventory cost per item. B. Closing inventory consists of goods purchased earlier in the period. C. Closing inventory consists of the most recently purchased goods. D. Cost of sales for the period is calculated using weighted average cost of the goods acquired.
Choose the statement which is correct. Assume that inventory prices are rising. A. The FIFO method gives the highest closing inventory figure in the statement of financial position. B. The LIFO method gives the highest closing inventory figure in the statement of financial position. C. The FIFO method gives the lowest closing inventory figure in the statement of financial position. D. The LIFO method gives the lowest figure for cost of sales.
In a period of declining prices, which of the following inventory methods generally results in the lowest value of ending inventory? Group of answer choices Average cost method LIFO method FIFO method Need more information to answer
Which one of the following is NOT a method used to value inventory?Select one:a.Reducing-balance methodb.First-in, first-out (FIFO) methodc.Last-in, first-out (LIFO) methodd.Weighted average method
Risen, Inc. has a beginning inventory of $16 which consists of 2 units at $8 each. It purchased 10 units at $10 each. It sold 5 units for $20 each. Which would result in the higher Gross Profit, FIFO, or LIFO and why?Multiple choice question.FIFO because the newer, more expensive units are assumed to be sold first making cost of goods sold and gross profit higher than LIFOFIFO because the older, less expensive units are assumed to be sold first making Cost of Goods Sold lower and Gross Profit higher than LIFOLIFO because the newer, more expensive units are assumed to be sold first making cost of goods sold and gross profit higher than LIFOLIFO because the older, less expensive units are assumed to be sold first making cost of goods sold lower and gross profit higher than LIFO
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