Question

Hite Co. was formed on January 2, 2017, to sell a single product. Over a two-year period, Hite's acquisition costs have increased steadily. Physical quantities held in inventory were equal to three months' sales at December 31, 2017, and zero at December 31, 2018. Assuming the periodic inventory system, the inventory cost method which reports the highest amount of each of the following is

Inventory 12/31/2017             Cost of Sales 2018

a) LIFO FIFO
b) LIFO LIFO
c) FIFO LIFO
d) FIFO FIFO

The correct answer is (d), but I can't understand WHY?!?!

Answer 1

FIFO method of valuation of Inventory Assumes Inventory Purchased earlier will be sold first. therefore closing Inventory consists of goods purchased recently. In the given question Inventory acqusition costs have increased steadily therefore closing Inventory is valued at recent Prices and Therefore it is highest.

Next Year Cost of Goods sold consists of Closing Inventory of previous Year and goods Purchased in the current year. In the given question it is stated Closing Inventory is Nil. It means all goods Purchased during the year are sold along with Opening Inventory. Opening Inventory is high if it is valued at FIFO and Cost of goods sold will be high.

answer D