In a period of rising purchase prices, which cost flow assumption provides the highest net profit?

Question

Quizplus · Accepted Answer

FIFO assumes that the first items purchased are also the first ones sold, which means the cost of goods sold is based on the lower prices of the earlier purchases. As prices increase, the cost of goods sold is lower, resulting in a higher net profit. On the other hand, LIFO assumes that the last items purchased are sold first, which means the cost of goods sold is based on the higher prices of the more recent purchases. Hence, during periods of rising purchase prices, LIFO would lead to a lower net profit. Moving weighted average calculates the average cost of all units available in stock, and so it does not directly account for the effects of rising prices.

In a Period of Rising Purchase Prices, Which Cost Flow