During periods of rising prices, the use of LIFO results in which effects on ending inventory and net income?

• A. Both will be higher
• B. Both will be lower
• C. Ending inventory higher, net income lower
• D. Ending inventory lower, net income higher

Answer: (B)

In periods of rising prices, using the Last-In, First-Out (LIFO) inventory method results in the cost of goods sold reflecting the most recent, and generally higher, costs of inventory. Consequently, because the cost of goods sold increases, the gross profit is reduced, leading to a lower net income.

Additionally, since LIFO assumes that the most recently purchased inventory is sold first, the older inventory, which would have lower costs, remains in ending inventory. As a result, this older, less expensive inventory results in a lower ending inventory value on the balance sheet.

This interplay between higher cost of goods sold and the older inventory remaining in stock establishes that both ending inventory and net income will be lower when utilizing LIFO during periods of inflation, confirming that the correct answer captures the essence of how LIFO impacts financial reporting in such economic conditions.