Question

If inventory is being valued at cost and the purchase price is steadily falling, which method of costing will yield the largest net income? average cost weighted average FIFO LIFO

Answer 1

Answer: LIFO

Step-by-step explanation:

Using the LIFO method, net income will be highest because it will result in a lower Cost of Goods sold.

Cost of Goods sold is calculated by deducting Ending inventory from Opening inventory and Purchases. With LIFO, the latter inventory is sold first which means that older inventory which in this case is more expensive, will form the ending inventory.

With a more expensive closing inventory, Cost of Goods sold will be lower and Net Income will be higher.