Which of the following statements is true regarding the LIFO and FIFO inventory costing methods?

• A. Under LIFO, ending inventory consists of the oldest costs, while under FIFO, ending inventory consists of the newest costs.
• B. LIFO and FIFO always produce the same net income regardless of price changes.
• C. FIFO always results in lower cost of goods sold than LIFO during periods of rising prices.
• D. Under FIFO, the earliest purchased goods are the first to be sold, while under LIFO, the most recently purchased goods are the first to be sold.

Answer: (D)

Verified step by step guidance

1. Understand the concepts of FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) inventory costing methods. FIFO assumes that the earliest goods purchased are sold first, while LIFO assumes that the most recently purchased goods are sold first.
2. Analyze how ending inventory is calculated under each method. Under FIFO, ending inventory consists of the newest costs (most recent purchases), while under LIFO, ending inventory consists of the oldest costs (earliest purchases).
3. Consider the impact of price changes on cost of goods sold (COGS). During periods of rising prices, FIFO typically results in lower COGS because older, lower-cost inventory is sold first, while LIFO results in higher COGS because newer, higher-cost inventory is sold first.
4. Evaluate the statement that LIFO and FIFO always produce the same net income. This is incorrect because net income is affected by COGS, which varies depending on the inventory costing method used, especially during periods of price changes.
5. Confirm the correct statement: Under FIFO, the earliest purchased goods are the first to be sold, while under LIFO, the most recently purchased goods are the first to be sold. This aligns with the definitions of the FIFO and LIFO methods.