Practice prompt · Q:inventory-ownership-cost-flow-and-measurement/cost-flow-under-rising-prices-001

Say which assumption reports lower income when prices rise

Tests whether the learner can reason from the cost flow assumption to the reported figures without computing them.

Updated Aug 18, 2026 Review due Nov 18, 2026

Practice

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The same purchases and the same sales produce three different incomes. The difference is a measurement convention, which is why a reader comparing two companies has to know which one each used before comparing anything.

Choose the best answer. a Last-in first-out, because it charges the newest and highest costs to cost of goods sold and leaves the oldest costs in inventory. b First-in first-out, because the oldest costs go to cost of goods sold. c Weighted average, because averaging pulls every figure downward. d All three report the same income, because total purchases are the same under each.

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Answer: a

Choice a. Last-in first-out reports the highest cost of goods sold and the lowest income when prices rise, with weighted average between the two.