Assuming rising inventory prices, which statement is correct?
A) FIFO reports a lower profit than other methods.
B) FIFO reports a lower value for cost of sales than other methods.
C) FIFO reports a lower value for closing inventory than other methods.
D) Using FIFO, it is not possible to calculate whether cost of sales/inventory is lower or higher than it would be if other assumptions about inventory valuation were made.

Question

Quizplus · Accepted Answer

FIFO (First-In, First-Out) assumes that the oldest inventory items are sold first, and therefore the cost of goods sold (COGS) is calculated using the oldest inventory prices. As prices of inventory rise over time, FIFO results in a lower value for COGS than other methods, which assume more recent inventory prices. Therefore, choice B is correct. Choice A is incorrect because FIFO can result in either a higher or lower profit depending on the specific circumstances. Choice C is incorrect because FIFO assumes the most recent inventory prices are still available in the inventory, and therefore reports a higher value for closing inventory than other methods. Choice D is incorrect because FIFO can be compared to other inventory valuation assumptions to determine the impact on COGS and inventory value.

Assuming Rising Inventory Prices, Which Statement Is Correct