If a small business uses LIFO inventory costing method and the price of raw materials rises, what is the likely result?

The LIFO (Last In, First Out) inventory costing method assumes that the most recently purchased items are the ones sold first. When the price of raw materials rises, using LIFO means that the business will recognize the higher costs of the most recently acquired inventory as the cost of goods sold. This increase in the cost of goods sold will, in turn, reduce the gross profit, assuming sales prices remain constant.

In this situation, gross profit is calculated as sales revenue minus the cost of goods sold. With elevated input costs, the cost of goods sold increases, which reduces the overall gross profit margin. Therefore, when prices of raw materials rise under a LIFO system, it typically results in a decrease in gross profit due to the higher expenses associated with the most recently purchased inventory being recognized first.

This understanding highlights the financial implications of inventory management strategies in response to fluctuating material costs, making it evident why option B is the likely outcome in this scenario.