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
Question
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
Solution
The LIFO (Last In, First Out) method generally results in the lowest value of ending inventory during a period of declining prices. Here's why:
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The LIFO method assumes that the last items added to the inventory are the first ones to be sold.
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In a period of declining prices, the cost of goods recently added to the inventory (the last ones in) would be lower than the cost of goods added earlier.
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Therefore, when these lower-cost items are assumed to be sold first (as per the LIFO method), the remaining inventory (which is assumed to be the older, higher-cost items) would have a lower total cost compared to the other methods.
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This results in a lower value of ending inventory under the LIFO method compared to the FIFO (First In, First Out) or Average Cost methods.
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The FIFO method would result in the highest ending inventory value in a period of declining prices, as it assumes the older, higher-cost items are sold first, leaving the newer, lower-cost items in ending inventory.
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The Average Cost method would result in a value somewhere in between, as it averages the cost of all items in inventory regardless of when they were added.
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