ExpertEasy1 markMultiple Choice
CPA · Question 31 · Area I: Business Analysis
In a period of rising prices, which inventory valuation method results in the highest Net Income and the highest Ending Inventory?
In a period of rising prices, which inventory valuation method results in the highest Net Income and the highest Ending Inventory?
Answer options:
A.
LIFO
B.
FIFO
C.
Weighted Average
D.
Moving Average
How to approach this question
Rising Prices + FIFO = Low COGS (Old prices) -> High Income -> High Inventory (New prices). Rising Prices + LIFO = High COGS (New prices) -> Low Income -> Low Inventory (Old prices).
Full Answer
B.FIFO✓ Correct
Under FIFO, the oldest costs (lowest in inflation) are expensed to COGS, maximizing Net Income. The newest costs (highest) remain in Ending Inventory.
Common mistakes
Confusing the impact on COGS vs Inventory.
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