Which inventory accounting method creates a higher ending inventory?

Which inventory accounting method creates a higher ending inventory?

• A. Weighted Average
• B. LIFO
• C. FIFO
• D. Specific Identification

Answer: (C)

The FIFO (First-In, First-Out) inventory accounting method creates a higher ending inventory in an environment of rising prices. This is because FIFO assumes that the oldest inventory items are sold first. As a result, the remaining inventory on hand is made up of the more recently purchased items, which are typically higher in cost under inflationary conditions. Thus, the ending inventory value reflects these higher costs, leading to a greater total compared to other methods. In contrast, LIFO (Last-In, First-Out) would typically report a lower ending inventory during periods of price increases because it uses the cost of the most recently acquired inventory for cost of goods sold, leaving the older, cheaper costs in inventory. The Weighted Average method averages the costs of all units available, resulting in a moderate ending inventory value that does not reflect the latest price trends as sharply as FIFO. Specific Identification tracks the actual cost of each unit sold, and while it may not consistently yield higher or lower values, in many cases the FIFO approach tends to provide the highest ending inventory in inflationary scenarios.

The FIFO (First-In, First-Out) inventory accounting method creates a higher ending inventory in an environment of rising prices. This is because FIFO assumes that the oldest inventory items are sold first. As a result, the remaining inventory on hand is made up of the more recently purchased items, which are typically higher in cost under inflationary conditions. Thus, the ending inventory value reflects these higher costs, leading to a greater total compared to other methods.

In contrast, LIFO (Last-In, First-Out) would typically report a lower ending inventory during periods of price increases because it uses the cost of the most recently acquired inventory for cost of goods sold, leaving the older, cheaper costs in inventory. The Weighted Average method averages the costs of all units available, resulting in a moderate ending inventory value that does not reflect the latest price trends as sharply as FIFO. Specific Identification tracks the actual cost of each unit sold, and while it may not consistently yield higher or lower values, in many cases the FIFO approach tends to provide the highest ending inventory in inflationary scenarios.