During a period of consistently rising prices (inflation), which inventory valuation method will result in the highest reported gross profit?

Answer options:

FIFO (First-In, First-Out)

LIFO (Last-In, First-Out)

AVCO (Average Cost)

Standard Costing

How to approach this question

Analyze how the cost flow assumption affects Cost of Sales. Lower Cost of Sales = Higher Profit.

Full Answer

A.FIFO (First-In, First-Out)✓ Correct

Under FIFO, the oldest (and therefore cheapest, in a period of inflation) inventory is assumed to be sold first. This leads to a lower Cost of Sales figure compared to AVCO, which in turn maximizes the reported Gross Profit.

Common mistakes

Thinking that higher closing inventory value leads to lower profit (it's the opposite).

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Practice the full ACCA FA — Financial Accounting Practice Exam 2

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