Final answer:
The prohibited inventory cost flow method under IFRS is LIFO (Last-In, First-Out). IFRS favors FIFO, Weighted Average Cost, and Specific Identification since they provide a more accurate reflection of inventory and fiscal health. The correct option is 2) LIFO (Last-In, First-Out)
Step-by-step explanation:
The inventory cost flow method that is prohibited under International Financial Reporting Standards (IFRS) is LIFO (Last-In, First-Out). IFRS does not permit the LIFO method since it can lead to an undervaluation of inventory and non-comparable financial statements. Instead, other methods are recommended by IFRS, such as FIFO (First-In, First-Out), Weighted Average Cost, and Specific Identification.
Under FIFO, the oldest inventory items are recorded as sold first, which often more closely matches the actual flow of goods. This method is advantageous in times of rising prices because it reports higher net income. Conversely, the Weighted Average Cost method spreads the cost of goods available for sale over the total units available, which smooths out price fluctuations. Specific Identification is used when each item in inventory can be directly identified; it is often applied to expensive or unique items.
LIFO, on the other hand, assumes that the most recently acquired items are sold first. This can lead to lower net income reporting during inflationary periods. However, since IFRS aims to ensure consistency and comparability across financial statements globally, the use of LIFO is not permitted, as it can skew the financial results and picture of a company's financial health. The correct option is 2) LIFO (Last-In, First-Out)