Question

Which of the following statements is true regarding the impact of FIFO (First In, First Out) on the cost of goods sold (COGS) and profits?

a) FIFO results in lower COGS, leading to higher profits.
b) FIFO results in higher COGS, leading to lower profits.
c) FIFO has no impact on COGS or profits.
d) FIFO leads to equalization of COGS and profits.

Answer 1

Using FIFO during periods of rising prices leads to lower COGS and higher profits due to the accounting of cheaper, older goods as sold first.

Step-by-step explanation:

The impact of the FIFO (First In, First Out) inventory method on the cost of goods sold (COGS) and profits depends on the movement of prices. When prices are rising, FIFO results in lower COGS because the older, cheaper goods are recorded as being sold first. This leads to higher reported profits because the newer, more expensive goods remain in inventory and do not affect COGS as much. Therefore, the correct answer is: a) FIFO results in lower COGS, leading to higher profits.