The UNO Company was formed on January 2, year 1, to sell a single product. Over a 2-year period, UNO’s acquisition costs have increased steadily. Physical quantities held in inventory were equal to 3 months’ sales at December 31, year 1, and zero at December 31, year 2. Assuming the periodic inventory system, the inventory cost method which reports the highest amount for each of the following is

 The UNO Company was formed on January 2, year 1, to sell a single product. Over a 2-year period, UNO’s acquisition costs have increased steadily. Physical quantities held in inventory were equal to 3 months’ sales at December 31, year 1, and zero at December 31, year 2. Assuming the periodic inventory system, the inventory cost method which reports the highest amount for each of the following is

Inventory December 31, year 1
Cost of sales year 2

Answer

 Inventory December 31, year 1 FIFO

Cost of sales year 2 FIFO

You Answered Correctly!
This answer is correct. In a period of rising prices, the highest balance in ending inventory will result from the FIFO inventory cost method. This is because the cost of the highest-priced (most recent) purchases are assigned to the ending inventory. Cost of sales for year 2 (regardless of cost flow assumption) will equal



Beginning    +    Net    −    Ending    +    Cost of
Inventory    Purchases    Inventory    Sales
 

Since there is no ending inventory at 12/31/Y2, cost of sales for year 2 will be the sum of beginning inventory and net purchases. The objective, then, is to maximize beginning inventory since purchases will be the same under either LIFO or FIFO.  Because beginning inventory (equal to inventory at December 31, year 1) was determined to be highest using the FIFO method, this is the method which will maximize cost of sales in year 2.