Multiple Choice
Which of the following is an advantage of using the LIFO (Last-In, First-Out) inventory method during a period of rising costs?
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5. Inventory
Periodic Inventory - FIFO, LIFO, and Average Cost
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Under the LIFO (Last-In, First-Out) method, it is assumed that the units sold are:
A
the oldest units in inventory
B
an average of all units available for sale
C
the units with the highest cost
D
the most recently purchased units
Verified step by step guidance1
Understand the LIFO (Last-In, First-Out) inventory valuation method: Under LIFO, the assumption is that the most recently purchased inventory items are sold first, leaving the older inventory items as unsold or remaining in stock.
Compare LIFO with other inventory methods: For example, FIFO (First-In, First-Out) assumes the oldest inventory is sold first, while the weighted average method calculates an average cost for all inventory items.
Analyze the implications of LIFO: Since the most recent inventory is sold first, the cost of goods sold (COGS) reflects the cost of the latest purchases, which can be higher during periods of inflation. This results in lower reported profits and potentially lower taxes.
Review the options provided in the problem: Eliminate incorrect choices such as 'the oldest units in inventory' (FIFO), 'an average of all units available for sale' (weighted average method), and 'the units with the highest cost' (not a standard inventory method).
Confirm the correct answer: Based on the LIFO method, the correct assumption is that the units sold are 'the most recently purchased units.'
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