If a firm wanted to report high profits, it would choose which method of inventory accounting in inflationary times?
A) FIFO
B) LIFO
C) FILO
D) GIGO

Question

Quizplus · Accepted Answer

FIFO (First-In, First-Out) method assumes that the first inventory items purchased or produced are sold first, and the most recently acquired inventory items remain in stock. In inflationary times, the cost of goods sold (COGS) under FIFO is lower compared to LIFO (Last-In, First-Out) method, which assumes the most recently acquired inventory items are sold first. This is because under FIFO, the cost of goods sold reflects the lower cost of the earlier inventory items, which were purchased or produced at lower prices. This results in a higher reported gross profit, which ultimately leads to higher reported profits. Thus, firms wanting to report high profits would choose the FIFO method of inventory accounting in inflationary times.

If a Firm Wanted to Report High Profits, It Would