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In a deflationary environment, which inventory method would likely yield higher

Practice Questions

Q1
In a deflationary environment, which inventory method would likely yield higher profits?
  1. FIFO
  2. LIFO
  3. Weighted Average
  4. None of the above

Questions & Step-by-Step Solutions

In a deflationary environment, which inventory method would likely yield higher profits?
  • Step 1: Understand what deflation means. Deflation is when prices of goods and services decrease over time.
  • Step 2: Learn about inventory methods. FIFO stands for 'First In, First Out', meaning the oldest inventory is sold first.
  • Step 3: Recognize that in a deflationary environment, older inventory costs are higher than newer inventory costs.
  • Step 4: Realize that using FIFO means selling the older, higher-cost inventory first.
  • Step 5: Understand that when older, higher costs are matched against revenues, it can lead to higher profits.
  • Step 6: Conclude that in a deflationary environment, using FIFO is likely to yield higher profits.
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