Question

Whether computed on a perpetual or periodic basis, inventory and Cost of Goods Sold (COGS) computed with FIFO are ________.

a. Higher than LIFO
b. Lower than LIFO
c. Equal to LIFO
d. Unrelated to LIFO

Answer 1

Inventory and Cost of Goods Sold computed with FIFO are higher than LIFO.

Step-by-step explanation:

Whether computed on a perpetual or periodic basis, inventory and Cost of Goods Sold (COGS) computed with FIFO are higher than LIFO.

FIFO stands for First-In, First-Out, which means that the oldest inventory is sold first. This results in the remaining inventory being valued at the most recent costs, which are typically higher. As a result, both the inventory and COGS calculated using FIFO will be higher compared to LIFO.

For example, if a company purchases 10 units of a product at $5 each and then purchases 10 more units at $10 each, FIFO would value the inventory at $100 (10 units * $10), while LIFO would value it at $75 (10 units * $5 + 10 units * $10). Therefore, FIFO results in higher inventory and COGS.