Question

The beginning inventory of a certain item for the Boutique Bungalows Resort was 10 units, which were purchased at $5 each. It purchased 5 units at $2.50 apiece, and later, 3 units at $5 apiece. The resort sold a total of 8 units during the current accounting period. Which of the following inventory valuation methods yields the highest ending inventory value for this inventory item?

a) FIFO
b) LIFO
c) weighted average
d) All these methods yield the same value for ending inventory.

Answer 1

The FIFO method yields the highest ending inventory value for this inventory item.

Step-by-step explanation:

The inventory valuation method that yields the highest ending inventory value for this inventory item is the FIFO (First-In-First-Out) method.

Using the FIFO method, the first units purchased are assumed to be sold first. Therefore, the ending inventory is valued using the latest purchases. In this case, the ending inventory would be valued at 3 units bought at $5 apiece, resulting in a higher value compared to the LIFO and weighted average methods.

The student's question focuses on inventory valuation and the effect of different methods on the ending inventory value. We have to consider FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and weighted average methods. Based on the information given, we calculate as follows:

FIFO: Under FIFO, the oldest inventory costs are used first. The last units bought at $5 will remain in the inventory, giving us the highest ending inventory value at $5 apiece for 10 remaining items.

LIFO: LIFO uses the most recent inventory costs first. The earlier purchased items at lower prices will remain, resulting in a lower ending inventory value than FIFO.

Weighted Average: This method takes the average cost of all units purchased. The ending inventory value will typically be between the values given by FIFO and LIFO.

Therefore, FIFO yields the highest ending inventory value for this inventory item.