Multiple Choice
In periods of rising prices, which of the following is an advantage of using the LIFO (Last-In, First-Out) inventory costing method?
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5. Inventory
Periodic Inventory - FIFO, LIFO, and Average Cost
Multiple Choice
The FIFO (First-In, First-Out) method assumes that:
A
all inventory items are sold at their average cost
B
the earliest goods purchased are the first to be sold
C
inventory is valued at the lower of cost or market
D
the most recently purchased goods are the first to be sold
Verified step by step guidance1
Understand the FIFO (First-In, First-Out) inventory valuation method: FIFO assumes that the earliest goods purchased are the first to be sold. This method is commonly used in accounting to track inventory costs and calculate the cost of goods sold (COGS).
Clarify the distinction between FIFO and other inventory methods: FIFO contrasts with methods like LIFO (Last-In, First-Out), which assumes the most recently purchased goods are sold first, and Weighted Average Cost, which calculates inventory costs based on the average cost of all items.
Recognize the implications of FIFO: Under FIFO, the cost of goods sold reflects the cost of the oldest inventory items, while the ending inventory reflects the cost of the most recent purchases. This can impact financial statements, especially during periods of inflation or deflation.
Review the options provided in the problem: The correct answer aligns with the FIFO assumption that the earliest goods purchased are the first to be sold. The other options describe different inventory valuation methods or principles.
Apply FIFO in practice: When solving problems involving FIFO, identify the chronological order of inventory purchases, calculate the cost of goods sold using the oldest inventory costs, and determine the value of ending inventory using the most recent purchase costs.
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