When prices are rising, the LIFO produces

Question

Question

This question was previously asked in

UGC NET Paper 2: Management 24th June 2019 Shift 2

Answer 1

The correct answer is Highest cost flow and lowest inventory

Key Points

LIFO refers to the Last in First Out approach of valuation of inventory.
This is the method where the new/ fresh inventory is sold out first (last in, will be first out).
In essence, the LIFO approach is based on the notion/ idea that businesses can save money on taxes during the period of growing prices.
It is more beneficial to use LFO as compared to FIFO, at the time of rising prices.
When there is inflation (increasing prices), new stock will cost more, and when it is sold out first, the COGS (Cost of Goods Sold) will be greater, which will result in higher cost flow and ultimately lower net income (profits).
Since the remaining inventory is older and less expensive than new one, so it is valued lower on the company's balance sheet.

Hence, the correct answer is Highest cost flow and lowest inventory.