Final answer:
A business with similar inventory items would likely use the average cost method, which utilizes the weighted average cost of all items to determine COGS and ending inventory, offering simplicity and fairness.
Option 'd' is the correct.
Step-by-step explanation:
A business whose inventory consists of similar items would be most likely to use the average cost flow assumption. This method simplifies the accounting process by taking the weighted average cost of all items in inventory to determine the cost of goods sold (COGS) and the value of ending inventory. It dilutes the effects of price fluctuations over time and is particularly suitable for businesses with large volumes of similar or identical items.
Let's break down the options provided in the question:
- LIFO (Last-In, First-Out) assumes the most recently purchased or produced items are sold first.
- FIFO (First-In, First-Out) assumes that the oldest inventory items are sold first.
- Specific identification is used when the inventory items are distinct and can be identified individually, which is not the case for similar items.
- The average method, as mentioned, calculates COGS and ending inventory based on the average cost of all inventory items.
Although all these methods are recognized under Generally Accepted Accounting Principles (GAAP), the average cost method is often preferred for the type of inventory described because of its simplicity and fairness in cost allocation among sold and remaining inventory items.