Question

In a period of rising prices, which inventory valuation method would generally yield both the

lowest ending inventory value and the lowest net income figure?

a) First in, first out (FIFO)
b) Last in, first out (LIFO)
c) Weighted average
d) Standard cost

Answer 1

The LIFO inventory valuation method typically leads to the lowest ending inventory value and the lowest net income figure during periods of rising prices, as it calculates COGS based on the most recent and higher costs.

Step-by-step explanation:

In a period of rising prices, the inventory valuation method that would generally yield both the lowest ending inventory value and the lowest net income figure is Last In, First Out (LIFO). This method assumes that the most recently purchased items are sold first; therefore, in a period of rising prices, the cost of goods sold (COGS) will be based on higher recent prices, resulting in a higher COGS and lower remaining inventory value, which is based on older, cheaper prices. Conversely, the First In, First Out (FIFO) method would result in a higher ending inventory and a higher net income because the COGS would be based on the older, lower-priced inventory. The Weighted Average method smooths out price changes by averaging the cost of all units available for sale during the period. This method would not result in the extremes of highest or lowest values for ending inventory or net income. The Standard Cost method uses predetermined costs and does not directly take rising prices into account for valuing inventory.