A major criticism of the FIFO inventory method is that it magnifies the effects of the business cycle on business income.

Question

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FIFO assumes that the first items purchased are the first items sold. This means that during periods of rising prices, the cost of goods sold will be lower than the actual cost of the goods sold, resulting in higher profits. Conversely, during periods of falling prices, the cost of goods sold will be higher than the actual cost of the goods sold, resulting in lower profits. This magnification of the effects of the business cycle on business income is a major criticism of the FIFO inventory method.

A Major Criticism of the FIFO Inventory Method Is That