Question

The FIFO method results in the largest gross profit because during times of increasing inventory prices, this method will produce the lowest cost of goods sold

Answer 1

The FIFO method results in the lowest cost of goods sold during times of increasing inventory prices.

Step-by-step explanation:

The topic of this question is Business.

The FIFO (First-In, First-Out) method is used in accounting to value the cost of goods sold and determine the ending inventory. Under the FIFO method, the oldest inventory is sold first, resulting in the lowest cost of goods sold during times of increasing inventory prices. This happens because the cost of older inventory is lower than the cost of newer inventory.

For example, let's say a company has inventory of 100 units. If the cost of the first 50 units purchased is $5 each and the cost of the next 50 units purchased is $10 each, and the company sells 60 units, the cost of goods sold under the FIFO method would be $350 [(50 * $5) + (10 * $10)] because it would assume that the first 50 units sold were from the lower-cost inventory.