QAEconomics › In periods of rising prices, which inventory costing method will yield the highest operating income?
Q

In periods of rising prices, which inventory costing method will yield the highest operating income?

a. FIFO

b. LIFO

c. Weighted Average

d. Specific Identification

A

Answer: b. LIFO

LIFO refers to a method of recording inventory in which goods or products that arrive last are sold off first. That is, newer products are sold first and older products are sold off last.

In periods of rising prices, LIFO is a better choice for recording inventory. Due to the rising prices of products, LIFO can help take advantage of lower taxes and can create a higher cash flow to the company. By selling off the latter products at higher prices, the company can generate more funds for operations. LIFO is mostly used by companies or businesses that have large inventories like large retail shops.

Although using this method, can also lead to a lower net income and higher taxes due to the costs of goods sold.

1 year ago
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