Question

Generally, which inventory costing method approximates most closely the current cost for each of the following?

Ending Inventory Cost of Goods Sold
A) FIFO LIFO
B) LIFO LIFO
C) FIFO FIFO
D) LIFO FIFO
A) Option A
B) Option B
C) Option C
D) Option D

Answer 1

The inventory costing method that most closely approximates current costs is FIFO for ending inventory and LIFO for COGS, making the correct answer Option A.

Step-by-step explanation:

The inventory costing method that approximates the current cost of ending inventory and cost of goods sold (COGS) differs:

• The First-In, First-Out (FIFO) method assumes that the oldest inventory items are sold first. Therefore, the ending inventory consists of the newest items. In an inflationary environment, this would imply that FIFO presents a higher value for ending inventory, closely approximating the current cost of acquiring inventory.
• The Last-In, First-Out (LIFO) method assumes the newest items are sold first, leaving the older stock in ending inventory. During inflation, LIFO will report lower ending inventory value but higher COGS, because the COGS will reflect more recent and higher purchase prices.

Given these insights, the answer would be:

Option A: FIFO for Ending Inventory and LIFO for Cost of Goods Sold (COGS) because FIFO will provide an ending inventory value that closely approximates the current cost of inventory, and LIFO will provide a COGS that closely reflects current cost of goods sold based on recent purchase prices.