Question

During the periods of rising costs, what results in higher EI, lower COGS, and higher GP?

1) Increase in sales
2) Decrease in sales
3) Increase in expenses
4) Decrease in expenses

Answer 1

During periods of rising costs, an increase in sales leads to higher ending inventory, lower cost of goods sold, and higher gross profit due to the FIFO inventory system.

Step-by-step explanation:

During periods of rising costs, the option that results in higher ending inventory (EI), lower cost of goods sold (COGS), and higher gross profit (GP) is an increase in sales. When sales increase, companies tend to sell more products. Assuming that the company uses a first-in, first-out (FIFO) inventory system during a period of rising costs, the older, cheaper goods are sold first, which leads to lower COGS. The higher sales volume increases revenue, and since COGS is lower, this results in a higher GP. The remaining inventory would consist of the more recently acquired, higher-cost items, which would be reflected as an increase in EI.