Discussion
When prices show a rising trend, which one of the following methods of inventory valuation will result in lower income and lower valuation of inventory ?
Answer: B
The method is LIFO (last in, first out).
When prices are rising, LIFO charges the most recent, highest-cost purchases to cost of goods sold. Cost of sales is therefore higher, so reported income is lower, and the closing stock is valued at the oldest, cheapest prices, so inventory valuation is also lower.
FIFO does the reverse: older, cheaper costs go to cost of sales, giving higher profit and a closing stock at recent high prices. The simple and weighted average methods fall between the two.
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