Question

Between LIFO and FIFO, which one produces the highest cost of goods sold? (assuming prices are rising)?

1) LIFO
2) FIFO

Answer 1

LIFO produces the highest cost of goods sold when prices are rising. The correct option is 1.

Step-by-step explanation:

In the context of accounting and inventory management, LIFO (Last-In, First-Out) and FIFO (First-In, First-Out) are methods used to calculate the cost of goods sold (COGS).

When prices are rising, LIFO typically produces the highest COGS. This is because under LIFO, the cost of goods sold is calculated based on the assumption that the most recently acquired inventory is sold first. As prices increase, the newer, higher-priced inventory is used to calculate the COGS, leading to higher costs.

On the other hand, FIFO assumes that the oldest inventory is sold first, resulting in a lower COGS when prices are rising.

Hence, Option 1 is correct.