In an inflationary environment, which inventory cost flow method will produce the lowest amount of cost of goods sold and the highest net income?
A) FIFO
B) Weighted average
C) All methods will produce the same amount of cost of goods sold.
D) LIFO

Question

Quizplus · Accepted Answer

In an inflationary environment, FIFO (first-in, first-out) produces the lowest amount of cost of goods sold, as the oldest inventory items are being sold first at their lower costs. This results in a higher value of the remaining inventory, which is reported on the balance sheet, and ultimately leads to a higher net income. LIFO (last-in, first-out) would produce the highest cost of goods sold, as the most recently acquired inventory items are sold first at their higher costs. Weighted average and specific identification methods would fall somewhere in between FIFO and LIFO, but would not provide as low a cost of goods sold as FIFO during an inflationary period.

In an Inflationary Environment, Which Inventory Cost Flow Method Will