Question

Management wants to properly match cost of goods sold to net sales and reduce inventory on the balance sheet. What specific accounting method should be used?

A. First-in, first-out (FIFO)
B. Last-in, first-out (LIFO)
C. Weighted average cost (WAC)
D. Specific identification

Answer 1

The specific accounting method that should be used is FIFO (First-in, first-out). This method matches the earliest costs with revenues and ensures accurate representation of inventory value.

Step-by-step explanation:

The specific accounting method that should be used to properly match cost of goods sold to net sales and reduce inventory on the balance sheet is FIFO (First-in, first-out). Under the FIFO method, the earliest (oldest) costs are matched with revenues, meaning that the inventory costs are assigned based on the assumption that the first goods sold are the oldest units in inventory. This method helps in maintaining a more accurate representation of the current value of inventory as it reflects the costs that were incurred first.

For example, if a company purchases a particular product multiple times at different prices, FIFO assumes that the earliest purchases are the first ones to be sold.

Using the FIFO method allows the company to have an accurate representation of the inventory's value on the balance sheet and ensures that the cost of goods sold is properly matched to net sales.