In a period of inflation (prices are rising), which inventory cost formula will result in higher net income?
A)FIFO
B)average cost
C)Cost of goods sold for the period will be the same under both formulas.
D)There would be no effect on net income.

Question

Quizplus · Accepted Answer

In a period of inflation, the FIFO (First In, First Out) method will result in higher net income because it assumes that the oldest (and usually cheaper) inventory is sold first, leading to lower cost of goods sold (COGS) and, consequently, higher gross profit compared to methods that assume newer (and more expensive) inventory is sold first, like LIFO (Last In, First Out). The average cost method would result in a COGS and net income that falls between FIFO and LIFO, but still lower than FIFO during inflation.

In a Period of Inflation (Prices Are Rising), Which Inventory