Final answer:
In times of rising prices, LIFO results in higher cost of goods sold and lower ending inventory due to the utilization of older inventory costs. The correct option is D.
Step-by-step explanation:
Because LIFO (Last-In, First-Out) uses older costs for inventory, in times of rising prices, the cost of goods sold will be higher. This is because LIFO assumes that the most recent items added to the inventory are sold first, so during inflation, the newer items with higher costs remain in inventory. Conversely, the older, cheaper items are the ones that get sold, resulting in a higher cost of goods sold.
When considering the implications on ending inventory, LIFO methodology would result in the ending inventory being lower, because the leftover inventory would consist of the oldest and potentially least expensive items at historical costs. In an inflationary context, such as the one experienced in Israel in 1985, the impact of LIFO can be more pronounced on a business's financial reporting, leading to a mismatch between current replacement costs and recorded inventory values.
Contextualizing with the real-world scenario of Israel's high inflation in the mid-1980s, businesses faced difficulties in pricing and consumers had trouble assessing the real value and cost of goods. This dilemma showcases the challenges faced in high inflation environments and the additional complexities inventory accounting methods like LIFO add to financial decision-making.