Question

Best Company has accounted for inventory using FIFO for the past three years. This application is an example of the principle:

a) Consistency
b) Materiality
c) Conservatism
d) Matching

Answer 1

Best Company's consistent use of FIFO over three years exemplifies the (a) consistency principle in accounting, ensuring comparability of financial records across periods.

Step-by-step explanation:

The principle illustrated by Best Company's use of FIFO (First-In, First-Out) for the past three years refers to the consistency principle in accounting.

This principle states that once a company adopts an accounting method, it should continue to use it consistently in future accounting periods.

The consistency principle is essential because it allows for comparability of financial statements across different periods, providing a fair and accurate representation of the company's financial performance and position over time.

Conservatism, another principle mentioned, is when a company exercises caution in reporting figures and chooses the least optimistic outcome when presented with two equally possible results.

However, this principle does not apply to the use of an inventory method over multiple periods.

It is important to note that consistently applying the FIFO method does not reflect the principle of materiality (which concerns the significance of financial information's impact on decision-making) or the matching principle (where expenses are matched with the revenues they help generate).