When comparing the average and FIFO inventory cost formulas during a period when prices are rising, which of the following statements is correct?
A) FIFO will result in a lower inventory balance reported on the balance sheet.
B) Average will result in a higher cash flow.
C) FIFO will result in a higher profit reported on the income statement.
D) Average will result in a higher gross profit reported on the income statement.

Question

Quizplus · Accepted Answer

When prices are rising, FIFO (First In, First Out) results in a higher profit reported on the income statement because the older, lower-cost items are recognized as cost of goods sold first, leaving the newer, higher-cost items in inventory. This leads to a higher ending inventory value and lower cost of goods sold, thus higher gross profit.

When Comparing the Average and FIFO Inventory Cost Formulas During