What is the primary difference between LIFO and FIFO in inventory costing?

• A. LIFO uses the most recent inventory for COGS, FIFO uses the oldest inventory; with rising prices, LIFO yields higher COGS and lower net income.
• B. LIFO uses the oldest inventory for COGS, FIFO uses the most recent; with rising prices, FIFO yields higher COGS.
• C. LIFO and FIFO always yield the same COGS.
• D. LIFO uses average cost; FIFO uses specific lot tracking.

Answer: (A)

The main idea is how cost flow assumptions assign which inventory costs become cost of goods sold. LIFO treats the most recently purchased items as sold first, while FIFO treats the oldest items as sold first. When prices are rising, the newest purchases carry higher costs, so LIFO makes COGS reflect those higher, current costs. This pushes COGS up, which lowers gross profit and net income, and leaves ending inventory composed of older, cheaper costs (and usually a smaller ending balance). Conversely, FIFO matches current revenues with older, cheaper costs, so COGS is lower, gross profit and net income are higher, and ending inventory contains the newer, higher-cost items.

So the statement that aligns with this is that LIFO uses the most recent inventory for COGS, FIFO uses the oldest, and, with rising prices, LIFO yields higher COGS and lower net income. The other options misstate which costs are used or how COGS behaves under rising prices.