"Inventory profits" are most likely to occur in an inflationary economy under which of the following inventory cost assumptions?
A) Weighted average
B) Specific item
C) FIFO
D) Lower of cost or market

Question

Quizplus · Accepted Answer

FIFO assumes that the oldest inventory is sold first, which means that the cost of goods sold on the income statement reflects the oldest and potentially lower-priced inventory. In an inflationary economy, the cost of inventory is likely to increase over time, which means that FIFO will result in a lower cost of goods sold and higher net income. This higher net income will lead to higher inventory profits when inventory is sold at a price above its recorded cost.

"Inventory Profits" Are Most Likely to Occur in an Inflationary