Final answer:
During rising prices, the FIFO method yields the lowest amount for inventory on the balance sheet. Under this method, the older, lower-cost inventory is assumed to be sold first, leaving the newer, higher-cost inventory on the balance sheet.
Step-by-step explanation:
During rising prices, the method that yields the lowest amount for inventory on the balance sheet is called the FIFO (First-In, First-Out) method.
In FIFO, the assumption is that the first units purchased are the first ones sold. Therefore, during rising prices, the older, lower-cost inventory is assumed to be sold first, leaving the newer, higher-cost inventory on the balance sheet.
For example, let's say a company purchases 100 units of a product at $5 per unit (older inventory) and later purchases another 100 units at $10 per unit (newer inventory). If the company sells 150 units at a price of $12 per unit during rising prices, under the FIFO method, the cost of goods sold would be calculated as follows:
- 100 units at $5 per unit = $500
- 50 units at $10 per unit = $500
Therefore, the cost of goods sold would be $500 + $500 = $1,000, and the remaining 50 units at $10 per unit would be left in the inventory on the balance sheet.