Question

The beginning inventory of a certain item for the Bay Resort was 2 units, which were purchased at $10 each. It purchased 5 units at $5 each, and later, 3 units at $10 each. The resort sold a total of 8 units during the current accounting period. Which of the following inventory valuation methods yields the lowest ending inventory value for this inventory item?

1) FIFO
2) LIFO
3) Weighted Average
4) All will have the same value

Answer 1

The correct answer is 2) LIFO (Last-In, First-Out) as it will have the lowest ending inventory value for this inventory item.

Step-by-step explanation:

To determine which inventory valuation method yields the lowest ending inventory value, we need to calculate the inventory value using each method. The methods we will consider are FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average.

1) FIFO: Under the FIFO method, the cost of the oldest units is used first. The ending inventory will consist of the most recently purchased units, which were acquired at a higher cost. Therefore, FIFO will yield the highest ending inventory value.

2) LIFO: With LIFO, the cost of the most recently purchased units is used first. This means that the ending inventory will consist of the oldest units, which were acquired at a lower cost. Therefore, LIFO will yield the lowest ending inventory value.

3) Weighted Average: The weighted average method takes into account the average cost of all units. The ending inventory value will be based on the average cost of all the units. Therefore, Weighted Average will yield an ending inventory value that is between FIFO and LIFO.