Final answer:
During rising prices, the FIFO method yields the lowest COGS figure, as it sells older, lower-cost inventory first. This results in lower COGS and higher profits, which can influence tax calculations and income-sensitive analyses in a period of inflation.
Step-by-step explanation:
During rising prices, the method that yields the lowest cost of goods sold (COGS) figure is the First-In, First-Out (FIFO) accounting method. This is because the FIFO method assumes that the oldest inventory, which was acquired at lower costs, is sold first. With rising prices, the more recent inventory has a higher cost, which remains on the balance sheet as ending inventory rather than being matched against revenue as COGS.
When using FIFO during a period of inflation, the reported COGS will be lower compared with other methods like Last-In, First-Out (LIFO) or Weighted Average Cost. This lower COGS can result in higher reported profits and, consequently, can affect the calculation of taxes and any other income-sensitive analyses.
It is essential to consider the impact of such accounting methods on the cost of living calculations, such as the Consumer Price Index (CPI) and its susceptibility to biases like the substitution bias. The CPI measures changes in the price level of a market basket of consumer goods and services purchased by households, implying that substitution away from goods with rising prices may understate the true impact on a consumer's cost of living.