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Under inflationary conditions, which of the methods will not show greatest value of cost of goods sold?
  • a)
    FIFO
  • b)
    LIFO
  • c)
    Weighted Average
  • d)
    None of the above
Correct answer is option 'A,C'. Can you explain this answer?
Most Upvoted Answer
Under inflationary conditions, which of the methods will not show grea...
Understand the question:
The question is asking which methods will not show the greatest value of cost of goods sold (COGS) under inflationary conditions.

Understand the methods:
1. FIFO (First-In, First-Out): This method assumes that the goods purchased first are sold first. In other words, the oldest inventory is sold first.
2. LIFO (Last-In, First-Out): This method assumes that the goods purchased last are sold first. In other words, the most recent inventory is sold first.
3. Weighted Average: This method calculates the average cost of all units of inventory available for sale during a period.

Analysis of methods:
In an inflationary environment, the cost of goods tends to increase over time. Let's analyze each method to understand how they would reflect the COGS under inflationary conditions.

1. FIFO:
- Under inflation, FIFO would result in a lower COGS because the oldest and presumably cheaper inventory is sold first. As the cost of goods increases over time, the inventory remaining in stock would have a higher value.
- Therefore, FIFO would not show the greatest value of COGS under inflationary conditions. (Answer: A)

2. LIFO:
- Under inflation, LIFO would result in a higher COGS because the most recent and presumably more expensive inventory is sold first. As the cost of goods increases over time, the remaining inventory would have a lower value.
- LIFO would show the greatest value of COGS under inflationary conditions.

3. Weighted Average:
- The weighted average method calculates the average cost of all units of inventory available for sale. It takes into account both the old and new inventory costs.
- Under inflation, the weighted average method would reflect a higher COGS than FIFO but lower than LIFO. It strikes a balance between the oldest and most recent inventory costs.
- Therefore, the weighted average method would not show the greatest value of COGS under inflationary conditions. (Answer: C)

Conclusion:
Under inflationary conditions, the FIFO and weighted average methods will not show the greatest value of COGS. LIFO would reflect the highest value of COGS.
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Under inflationary conditions, which of the methods will not show greatest value of cost of goods sold?a)FIFOb)LIFOc)Weighted Averaged)None of the aboveCorrect answer is option 'A,C'. Can you explain this answer?
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