In a period of rising prices, which inventory method yields the lowest COGS and the highest ending inventory?

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Enhance your accounting skills for the PSIA Accounting Exam. Use flashcards and multiple-choice questions to prepare effectively with hints and explanations. Get set for your exam success!

Multiple Choice

In a period of rising prices, which inventory method yields the lowest COGS and the highest ending inventory?

Explanation:
When prices are rising, the cost flow that uses the oldest purchases for cost of goods sold leaves the newer, higher costs in ending inventory. FIFO assigns the first items bought to COGS, so COGS reflects cheaper, earlier costs and ending inventory holds the newer, more expensive costs. This combination produces the lowest COGS and the highest ending inventory among the common methods. LIFO, by contrast, assigns the most recent (higher) costs to COGS, raising COGS and lowering ending inventory, while the Weighted Average method falls between the two extremes.

When prices are rising, the cost flow that uses the oldest purchases for cost of goods sold leaves the newer, higher costs in ending inventory. FIFO assigns the first items bought to COGS, so COGS reflects cheaper, earlier costs and ending inventory holds the newer, more expensive costs. This combination produces the lowest COGS and the highest ending inventory among the common methods. LIFO, by contrast, assigns the most recent (higher) costs to COGS, raising COGS and lowering ending inventory, while the Weighted Average method falls between the two extremes.

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