Which of the following methods gives a conservative closing stock value during a period of rising prices?
Answer Details
The LIFO (Last-In, First-Out) method gives a conservative closing stock value during a period of rising prices.
In the LIFO method, the assumption is that the last goods purchased are the first goods sold. Therefore, the cost of goods sold is based on the cost of the most recent purchases, while the value of the ending inventory is based on the cost of the oldest purchases. In a period of rising prices, the cost of the most recent purchases will be higher than the cost of the oldest purchases, resulting in a lower ending inventory value and a higher cost of goods sold. This will result in a lower net income, which is a conservative approach.
On the other hand, the FIFO (First-In, First-Out) method assumes that the first goods purchased are the first goods sold. Therefore, the cost of goods sold is based on the cost of the oldest purchases, while the value of the ending inventory is based on the cost of the most recent purchases. In a period of rising prices, the cost of the oldest purchases will be lower than the cost of the most recent purchases, resulting in a higher ending inventory value and a lower cost of goods sold. This will result in a higher net income, which is an aggressive approach.
Simple average and periodic simple average methods are not generally used to value inventory during a period of rising prices because they do not differentiate between the cost of older and newer purchases.
Therefore, the correct answer to the question is "LIFO."