Question

If there's a write-up, which cost of inventory is used for LIFO, FIFO & Avg. Cost Method?

a. LIFO: Current Cost, FIFO: Historical Cost, Avg. Cost: Weighted Average Cost
b. LIFO: Historical Cost, FIFO: Current Cost, Avg. Cost: Weighted Average Cost
c. LIFO: Weighted Average Cost, FIFO: Current Cost, Avg. Cost: Historical Cost
d. LIFO: Current Cost, FIFO: Weighted Average Cost, Avg. Cost: Historical Cost

Answer 1

Inventory valuation methods account for the cost of inventory differently: LIFO uses historical cost, FIFO uses current cost, and Average Cost Method uses a weighted average of all items in inventory.

Step-by-step explanation:

The cost of inventory under different inventory valuation methods is accounted for in various ways:

• LIFO (Last-In, First-Out): This method assumes that the last items placed in inventory are the first sold. Therefore, the cost of the oldest inventory items, or historical cost, remains on the balance sheet while the cost of the newest items is used in the cost of goods sold (COGS).
• FIFO (First-In, First-Out): This method assumes that the first items placed in inventory are the first sold. Under FIFO, the cost of the newest inventory items, or current cost, remains on the balance sheet as unsold inventory. The cost of the oldest inventory is used in the COGS.
• Average Cost Method: This method calculates a weighted average cost of all items in inventory, both old and new, and applies this average cost to the COGS and ending inventory on the balance sheet.

Therefore, the correct answer to the student's question is b. LIFO: Historical Cost, FIFO: Current Cost, Avg. Cost: Weighted Average Cost.