Final answer:
Choosing FIFO during inflation results in lower costs of goods sold and higher ending inventory on financial statements, as FIFO sells the oldest, cheaper inventory first and counts the newer, more expensive items in ending inventory.
Step-by-step explanation:
If Company D opts for FIFO (First In, First Out) instead of LIFO (Last In, First Out) during an inflation period, the direct answer to the financial statement impact would be: b. Cost of goods sold will be lower and ending inventory will be higher.
FIFO assumes that the oldest items in inventory are sold first, which typically reflects a lower cost than more recently acquired inventory due to inflation. Consequently, using FIFO when prices are rising means recording lower expenses in the form of Cost of Goods Sold, leading to higher net income in the short term. Moreover, the ending inventory is valued at the more recent—and typically higher—inflated prices, resulting in a higher inventory value on the balance sheet.
During times of inflation, considering FIFO over LIFO can have distinct benefits for reporting purposes but may not necessarily indicate a company's efficiency in productivity or innovation. It's crucial for a business to weigh the pros and cons of each inventory valuation method concerning their overall financial strategy and performance measurement.