Final answer:
FIFO (First In, First Out) is commonly used in inventory valuation because it provides a more realistic representation of costs and income on the balance sheet. Using FIFO ensures that the cost of goods sold reflects the most recent prices, which can help in making informed business decisions and analyzing profitability.
Step-by-step explanation:
FIFO (First In, First Out) is a method of inventory valuation where the oldest items in inventory are sold or used first. On the other hand, identified cost inventory valuation is a method where each item in inventory is assigned a specific cost.
Economically, FIFO is commonly used because it provides a more realistic representation of costs and income on the balance sheet. This is especially important when prices are subject to inflation or fluctuation. Using FIFO ensures that the cost of goods sold reflects the most recent prices, which can help in making informed business decisions and analyzing profitability.
For example, consider a company that sells bottles of perfume. If the prices of perfumes increase over time, using FIFO would mean that the cost of goods sold and ending inventory would reflect the higher prices, giving a more accurate picture of profitability.