What does the FIFO method indicate about the Cost of Goods Sold during periods of rising prices?

The First-In, First-Out (FIFO) method is an inventory valuation approach that assumes the oldest inventory items are sold first. During periods of rising prices, the cost of the older inventory (which is what FIFO uses for calculating the Cost of Goods Sold, or COGS) will typically be lower than the current prices of the newer inventory.

As a result, when FIFO is applied in a scenario with increasing costs, the calculated COGS will be lower. This occurs because the older, less expensive items are recognized as sold, while the newer, more expensive items remain in inventory, leading to a lower COGS and potentially higher net income.

Consequently, the correct indication of COGS under FIFO during periods of rising prices is that it is lower compared to other methods such as Last-In, First-Out (LIFO), where the most recently purchased and therefore more expensive goods are included in COGS. This distinction is crucial when analyzing how inventory accounting methods affect financial statements.