Compare FIFO, LIFO, and weighted-average inventory methods on their impact on COGS and ending inventory during rising prices.

• A. FIFO yields higher COGS and lower ending inventory during rising prices.
• B. LIFO yields lower COGS and higher ending inventory during rising prices.
• C. Weighted-average yields the exact same results as FIFO during rising prices.
• D. FIFO generally yields lower COGS and higher ending inventory; LIFO yields higher COGS and lower ending inventory; weighted-average falls between.

Answer: (D)

When prices are rising, the way you assign costs to goods sold and to ending inventory depends on the cost flow assumption. FIFO uses the oldest (lower) costs to determine COGS, so you sell with cheaper costs and leave the newer (higher) costs in ending inventory. As a result, COGS tends to be lower and ending inventory higher with FIFO.

In contrast, LIFO uses the newest (higher) costs for COGS, so you’re selling at higher costs and leaving older, cheaper costs in ending inventory. That makes COGS higher and ending inventory lower under rising prices.

Weighted-average blends all costs available for sale into a single average cost per unit. This average sits between the oldest and newest costs, so the COGS and ending inventory figures fall between FIFO and LIFO values. Under rising prices, the weighted-average method therefore yields results that are in between the FIFO and LIFO results.