Explain FIFO, LIFO, and Weighted Average methods and how they affect COGS and ending inventory.

• A. FIFO uses oldest costs for COGS; LIFO uses newest; Weighted Average uses a single average cost. Rising costs: FIFO yields lower COGS and higher ending inventory; LIFO yields higher COGS and lower ending inventory.
• B. FIFO uses newest costs for COGS; LIFO uses oldest; Weighted Average uses an average based on date.
• C. FIFO yields higher COGS in rising costs; LIFO yields lower ending inventory.
• D. Weighted Average always equals FIFO.

Answer: (A)

The main idea here is how different cost-flow assumptions assign costs to the goods sold (COGS) and to ending inventory when prices change over time. FIFO means the oldest costs are the ones moved to COGS, so the units sold are priced with the cheapest, earliest purchases, and the ending inventory is left with the most recent, higher costs. LIFO, on the other hand, uses the newest costs for COGS, so the units sold are priced with the latest, often higher costs, leaving older, cheaper costs in ending inventory. The Weighted Average method spreads total cost evenly across all units available for sale, so every unit has the same average cost. COGS and ending inventory under this method reflect that average cost and tend to fall between the FIFO and LIFO results.

When costs are rising, FIFO tends to produce a lower COGS and a higher ending inventory because it uses older, lower costs for COGS while the ending inventory reflects the newer, higher costs. LIFO tends to produce a higher COGS and a lower ending inventory since the most recent, higher costs are included in COGS. The Weighted Average method yields values that sit between FIFO and LIFO, since the average cost per unit lies between the oldest and newest costs and is applied uniformly to units sold and remaining in inventory.