ExpertEasy1 markMultiple Choice
CPA · Question 22 · Area II: Balance Sheet Accounts
During a period of rising prices, which inventory method will result in the highest Net Income and the highest Inventory balance?
During a period of rising prices, which inventory method will result in the highest Net Income and the highest Inventory balance?
Answer options:
A.
FIFO
B.
LIFO
C.
Weighted Average
D.
Moving Average
How to approach this question
Visualize the flow of costs. Rising prices: Old = Cheap, New = Expensive. <br/>FIFO: COGS = Old (Cheap) -> High Profit. End Inv = New (Expensive) -> High Asset.
Full Answer
A.FIFO✓ Correct
In a period of rising prices, FIFO charges the oldest (lowest) costs to COGS, resulting in higher Net Income. It leaves the newest (highest) costs in Ending Inventory, resulting in a higher Inventory balance.
Common mistakes
Confusing the impact on COGS vs Inventory.
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