Question

Assuming no beginning inventory, what can be said about the trend of inventory prices if cost of goods sold computed when inventory is valued using the FIFO method exceeds cost of goods sold when inventory is valued using the LIFO method?
a.Prices decreased.
b.Prices remained unchanged.
c.Prices increased.
d.Price trend cannot be determined from information given

Answer 1

Answer:

a.Prices decreased.

Explanation:

In inventory management one can use the FIFO or LIFO.

FIFO means first in first out, so goods bought first are the one to be given out for sale. So remaining inventory has most recent cost in the market.

LIFO is last in first out, so the most recent inventory is sold first. Remaining inventory will have older costs of items in the market.

If FIFO exceeds the LIFO in this scenario it implies that price decreases.

If initial price was high, and the more expensive goods were given out using FIFO. Then the cost of goods sold using FIFO will be high.

On the other hand if LIFO is used for a stock that was previously expensive and is now cheap, the cheaper goods will be given out first. So the cost of goods sold will be low.