Accounting for IGCSE & O level - Final Statements (Section 1 - No. 14)
A company uses the FIFO method. During a period of deflation, how does this impact their COGS and profit?
COGS is higher and profit is lower.
COGS is lower and profit is higher.
COGS is higher and profit is higher.
COGS is lower and profit is lower.
Explication
In a deflationary environment, the older, higher-cost inventory remains in COGS, making COGS higher and profit lower under FIFO.