When using LIFO in a declining price environment, what is the effect on Net Income?

When utilizing the Last In, First Out (LIFO) inventory method in a declining price environment, the most recent inventory costs—generally higher—are expensed first. This results in a higher cost of goods sold (COGS) compared to earlier inventory costs at lower prices. Consequently, since LIFO is based on the costs of the most recently acquired inventory, in a period of declining prices, the older, cheaper inventory remains on the books, while the more expensive inventory is matched against current revenues.

The effect of this situation is that COGS increases and net income decreases. Therefore, the notion that net income would be higher is misleading in this context. Instead, the correct outcome of using LIFO in a declining price environment leads to lower net income due to the elevated COGS relative to revenue.

Thus, considering the mechanics of LIFO and the specific conditions of price decline, the appropriate answer would be that net income is lower.