Earl. co was formed on january 2,2007, to sell a single product. Over a 2 year p

Question

Earl. co was formed on january 2,2007, to sell a single product. Over a 2 year period, earl's acquisition costs have increased steadily. Physical quantities held in inventory were equal to 3 months' sales at December 31, 2007, and 0 at December 31, 2008. Assuming the periodic inventory system, the inventory cost method which reports the highest amount of each of the following is: Inventory (december 31,2007) -FIFO COGS (2008)-FIFO. Can someone please explain me why FIFO reports higher Inventory 2007 & higher COGS in 2008.

Explanation / Answer

In FIFO method, increasing and increased costs are added to ending inventory which results higher profits. In 2007, the increase in prices accumulated in value of inventory.

In 2008, beginning inventory is equals to ending inventory of 2007 and under FIFO method that inventory first issued for sale which results higher cost of goods sold due to increased prices already accumulated in value of inventory in 2007.

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