QuestionAugust 15, 2025

In an inflationary period, what method of inventory valuation would lower profits? Specific Identification D LIFO FIFO C Weighted Average

In an inflationary period, what method of inventory valuation would lower profits? Specific Identification D LIFO FIFO C Weighted Average
In an inflationary period, what method of inventory valuation would lower profits? Specific Identification D LIFO FIFO C Weighted Average

Solution
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Answer

LIFO Explanation 1. Identify the impact of inventory valuation methods In an inflationary period, costs increase over time. Inventory valuation methods affect how these costs are reflected in financial statements. 2. Analyze LIFO method **LIFO (Last-In, First-Out)** assumes the most recent inventory costs are expensed first. During inflation, this results in higher cost of goods sold and lower profits because newer, more expensive inventory is used up first. 3. Compare with other methods Other methods like FIFO, Weighted Average, and Specific Identification typically result in lower cost of goods sold during inflation, leading to higher profits compared to LIFO.

Explanation

1. Identify the impact of inventory valuation methods<br /> In an inflationary period, costs increase over time. Inventory valuation methods affect how these costs are reflected in financial statements.<br /><br />2. Analyze LIFO method<br /> **LIFO (Last-In, First-Out)** assumes the most recent inventory costs are expensed first. During inflation, this results in higher cost of goods sold and lower profits because newer, more expensive inventory is used up first.<br /><br />3. Compare with other methods<br /> Other methods like FIFO, Weighted Average, and Specific Identification typically result in lower cost of goods sold during inflation, leading to higher profits compared to LIFO.
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