Question

When the cost of raw materials is increasing, what is the impact on FIFO accounting?

1) The cost of goods sold will be higher
2) The cost of goods sold will be lower
3) The ending inventory will be higher
4) The ending inventory will be lower

Answer 1

In FIFO accounting during times of increasing raw material costs, the cost of goods sold is lower because older inventory is sold first, while ending inventory is valued higher due to the inclusion of more expensive recent purchases.

Step-by-step explanation:

When the cost of raw materials is increasing, the impact on FIFO (First In, First Out) accounting is that the cost of goods sold (COGS) will be lower, because the older, cheaper inventory is used up first. Conversely, the ending inventory will be higher, since it consists of more recently purchased, more expensive items. In a period of rising prices, this results in a financial statement where reported profits are higher due to the lower COGS, and the balance sheet reflects a higher value in inventory assets.