In general, in a period of rising prices, FIFO produces higher gross profits than LIFO.

Question

BlackTom AI · Accepted Answer

The question asks us to evaluate the statement: In general, in a period of rising prices, FIFO produces higher gross profits than LIFO.
Option 1 (True): Think about how cost of goods sold (COGS) is computed under each method when prices rise. FIFO (First-In, First-Out) assigns the oldest, lower costs to COGS, because the earliest purchases are assumed sold first. With rising prices, those older costs are lower than current replacement costs, so COGS is lower and gross profit (Sales minus COGS) is higher. This matches the general rule that FIFO yields higher gross profit in inflationary periods. On the other hand, LIFO (Last-In, First-Out) uses the most recent, higher costs for COGS, raising COGS and lowering gross profit. Therefore, the statement is true from a gross-profit perspective under rising prices.
Option 2 (False): If prices are rising, this would imply COGS under FIFO is generally lower than under LIFO, not higher, leading to higher gross profit with FIFO. Saying FIFO produces lower gross profits would contradict the standard impact of cost flow assumptions during inflation, so this option is incorrect.
Additional nuance: While this question focuses on gross profit, it’s worth noting that other financial metrics (like net income or taxes) can be affected differently by FIFO vs. LIFO, especially in inflationary conditions. However, for gross profit alone, the rising-price environment typically favors FIFO due to lower COGS relative to LIFO.
In summary, the reasoning supports that the statement is true since FIFO generally yields higher gross profits than LIFO during periods of rising prices.

In general, in a period of rising prices, FIFO produces higher gross profits than LIFO.

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