In a period of rising prices, which inventory costing method yields the lowest cost of goods sold (COGS) and therefore the highest ending inventory?

• A. LIFO
• B. FIFO
• C. Weighted-average
• D. Specific identification

Answer: (B)

When prices are rising, the cost flow assumption determines which costs pair with revenue and which stay in ending inventory. The method that uses the oldest costs to value COGS and keeps the newest costs in ending inventory ends up with the smallest COGS and the largest ending inventory. That happens because you’re selling the older, cheaper purchases first, leaving the newer, more expensive purchases on hand. So COGS is minimized and ending inventory is maximized under this approach.

In contrast, a method that uses the newest costs for COGS pushes higher costs into cost of goods sold, increasing COGS and reducing ending inventory. The weighted-average method smooths costs across all units, giving values between these two extremes. Specific identification depends on which exact items are sold, so its effect on ending inventory isn’t as consistently high in a rising-price environment.