Question

If inventory costs are rising, which inventory costing method—first-in, first-out; last-in, first-out; or average cost—yields the (a) lowest ending inventory? (b) lowest net income? (c) largest ending inventory? (d) largest net income?, assuming the same method is used for tax purposes.

Please make sure you answer all questions

Answer 1

If inventory cost are rising:

a. Last in First out would result in lowest ending inventory as ending inventory balance would include units which were purchased earlier.

b. Last in First out would result in lowest net income as cost of goods sold would be high as it include units with higher prices which would result in lowest net income.

c. First in First out would result in largest ending inventory as ending inventory balance would units purchased later with rising prices which would ultimately result in higher ending inventory.

d. First in First out would result in largest net income as cost of goods sold would be lowest as it would include units purchased earlier at lower cost than units purchased later.