Explanation

When inventory unit costs are decreasing and inventory quantities are constant:

1. FIFO vs LIFO during decreasing costs:

• FIFO (First-In, First-Out): The oldest (higher) costs flow to COGS, leaving the newer (lower) costs in ending inventory
• LIFO (Last-In, First-Out): The newest (lower) costs flow to COGS, leaving the older (higher) costs in ending inventory

2. Impact on Gross Profit:

• FIFO: Higher COGS (older, higher costs) → Lower Gross Profit
• LIFO: Lower COGS (newer, lower costs) → Higher Gross Profit

3. Impact on Inventory Turnover: Inventory Turnover = COGS / Average Inventory

• FIFO: Higher COGS but lower ending inventory value → Higher numerator, lower denominator → Potentially higher turnover
• LIFO: Lower COGS but higher ending inventory value → Lower numerator, higher denominator → Potentially lower turnover

However, the question asks about FIFO compared to LIFO:

• Gross Profit: FIFO has lower gross profit than LIFO during decreasing costs
• Inventory Turnover: FIFO has lower inventory turnover than LIFO during decreasing costs because:
  • COGS difference (FIFO higher) is less significant than inventory value difference (FIFO much lower)
  • The denominator effect (inventory value) dominates the numerator effect (COGS)

Therefore, during decreasing costs:

• FIFO results in lower gross profit AND lower inventory turnover than LIFO
• Option A is correct

Key Concept: During decreasing costs, FIFO produces:

• Lower gross profit (higher COGS)
• Lower inventory turnover (lower COGS relative to even lower inventory value)