During a period of rising prices, which inventory method will result in the highest Net Income and the highest Inventory balance?

Answer options:

FIFO

LIFO

Weighted Average

Moving Average

How to approach this question

Visualize the flow of costs. Rising prices: Old = Cheap, New = Expensive. <br/>FIFO: COGS = Old (Cheap) -> High Profit. End Inv = New (Expensive) -> High Asset.

Full Answer

A.FIFO✓ Correct

In a period of rising prices, FIFO charges the oldest (lowest) costs to COGS, resulting in higher Net Income. It leaves the newest (highest) costs in Ending Inventory, resulting in a higher Inventory balance.

Common mistakes

Confusing the impact on COGS vs Inventory.

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