In a period of rising prices, how does FIFO compare to LIFO in terms of COGS?

• A. FIFO COGS is higher than LIFO COGS.
• B. FIFO COGS is lower than LIFO COGS.
• C. FIFO COGS is equal to LIFO COGS.
• D. LIFO COGS is lower than FIFO COGS.

Answer: (B)

When prices rise, the cost flow assumption affects which costs hit COGS. FIFO uses the oldest costs first, which are lower in a period of inflation, so COGS under FIFO tends to be lower. LIFO, on the other hand, uses the most recent, higher costs, making COGS higher. Therefore, FIFO COGS is lower than LIFO COGS in a period of rising prices. This also means FIFO leaves newer, higher costs in ending inventory and generally yields higher net income than LIFO in inflationary times.