Explanation:

Inflation refers to the general increase in the price level of goods and services in an economy over a period of time. Under inflationary conditions, the cost of goods sold (COGS) will increase, as the cost of raw materials, labor, and other expenses also increase.

There are different methods of inventory valuation, such as FIFO (first-in, first-out), LIFO (last-in, first-out), and weighted average. Each method has its own advantages and disadvantages, and the choice of method can affect the calculation of COGS and the profitability of the business.

FIFO Method:

The FIFO method assumes that the first items purchased are the first items sold. Therefore, the COGS is calculated based on the cost of the oldest inventory, and the ending inventory is based on the cost of the most recent purchases. Inflationary conditions will lead to higher COGS and lower ending inventory value under FIFO.

LIFO Method:

The LIFO method assumes that the last items purchased are the first items sold. Therefore, the COGS is calculated based on the cost of the most recent purchases, and the ending inventory is based on the cost of the oldest inventory. Inflationary conditions will lead to lower COGS and higher ending inventory value under LIFO.

Weighted Average Method:

The weighted average method calculates the average cost of all the units in inventory, based on the total cost of goods available for sale and the total units available for sale. Inflationary conditions will lead to a higher average cost and higher COGS under weighted average.

Conclusion:

Under inflationary conditions, LIFO and weighted average methods will not show the lowest value of COGS, as they will result in lower COGS and higher ending inventory value or higher average cost and higher COGS, respectively. On the other hand, FIFO will result in higher COGS and lower ending inventory value under inflation. Therefore, the choice of inventory valuation method can have a significant impact on the financial statements of a business, especially under inflationary conditions.