FIFO Lowers COGS in Rising Costs vs. Average

Steps:

• Identify FIFO principle: oldest, cheaper inventory costs assigned to cost of sales (COGS) first.
• Note rising costs: average cost (AVC) blends old and new prices, yielding higher COGS than FIFO.
• Compare effects: switching to FIFO reduces COGS relative to AVC, boosting profit; remaining inventory valued at newer, higher costs.
• Conclude impacts: lower COGS, higher profit, higher closing inventory.

Why D is correct:

• FIFO matches lower early costs to COGS and higher recent costs to ending inventory, increasing profit and inventory value per standard costing rules.

Why the others are wrong:

• A: COGS decreases, not increases, under FIFO.
• B: Closing inventory increases, not decreases.
• C: Closing inventory increases, not decreases.

Final answer: D