In a period of rising prices, which statement correctly compares the effects of FIFO, LIFO, and Weighted-Average on COGS and ending inventory?

• A. In rising prices, FIFO yields higher COGS and lower ending inventory; LIFO yields lower COGS and higher ending inventory; Weighted-average is between.
• B. FIFO yields higher COGS and lower ending inventory; LIFO yields lower COGS and higher ending inventory; Weighted-average is the same as FIFO.
• C. FIFO yields the same COGS as LIFO; Weighted-average yields always higher ending inventory.
• D. FIFO yields lower ending inventory and higher COGS; LIFO yields higher ending inventory.

Answer: (A)

When costs are rising, the method you use to cost goods sold and ending inventory affects which costs flow through the income statement versus stay in the balance sheet. FIFO uses the oldest, lower costs first for COGS, so COGS tends to be lower and the ending inventory, composed of the newest, higher costs, tends to be higher. LIFO uses the newest, higher costs first for COGS, so COGS tends to be higher and ending inventory, consisting of the older, lower costs, tends to be lower. Weighted-average blends all costs into a single average cost per unit, so both COGS and ending inventory fall between the FIFO and LIFO results.

For example, with 50 units at $10 and 50 units at $12, if 60 units are sold:

• FIFO: COGS = 50×10 + 10×12 = 620; ending inventory = 40×12 = 480.

• LIFO: COGS = 50×12 + 10×10 = 700; ending inventory = 40×10 = 400.

• Weighted-average: total cost = 1100 for 100 units, average cost = 11; COGS = 60×11 = 660; ending inventory = 40×11 = 440.

Thus, in rising prices, COGS ranking is FIFO lowest, then weighted-average, then LIFO highest; ending inventory ranking is FIFO highest, then weighted-average, then LIFO lowest.