Certainly! Let's walk through the reasoning step by step.
When dealing with inventory accounting methods, FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) are two common methods used to value inventory and cost of goods sold.
1. FIFO Method: In the FIFO method, the items that are purchased or produced first are the ones sold first. The ending inventory consists of the most recently purchased or produced goods.
2. LIFO Method: In the LIFO method, the items that are purchased or produced last are the ones sold first. The ending inventory consists of the oldest goods.
Now, let's consider an economy with declining costs:
- Declining Costs: The costs of goods decrease as time progresses.
### FIFO in an Economy with Declining Costs
- Under FIFO, since the oldest (and more expensive) items are sold first, the ending inventory will consist of the newer, less expensive items.
### LIFO in an Economy with Declining Costs
- Under LIFO, since the newest (and less expensive) items are sold first, the ending inventory will consist of the older, more expensive items.
Given these points, let's compare the ending inventory valuations:
- Under FIFO: Ending inventory is based on lower (more recent) costs.
- Under LIFO: Ending inventory is based on higher (older) costs.
However, there's an essential reversal here considering the true nature of declining costs:
- With FIFO, we actually end up with the older, more expensive inventory for valuations.
- With LIFO, the new (cheaper) items are sold first, so what's remaining in the ending inventory are the older, more expensive goods.
With declining costs, the LIFO method usually results in higher cost allocation to the cost of goods sold (recent low-cost goods are sold off), and therefore, it impacts the ending inventory valuation.
Therefore, in an economy with declining costs, the LIFO method will result in a lower valuation of ending inventory compared to the FIFO method.
### Answer:
OA. lower
