Question

When identical units of an item are purchased at different costs, what inventory cost flow method is used?

1) FIFO (First-In, First-Out)
2) LIFO (Last-In, First-Out)
3) Weighted Average
4) Specific Identification

Answer 1

The inventory cost flow method used when identical units of an item are purchased at different costs is FIFO (First-In, First-Out).

Step-by-step explanation:

The inventory cost flow method used when identical units of an item are purchased at different costs is FIFO (First-In, First-Out).

FIFO assumes that the first units purchased are the first ones sold. This means that the cost of the oldest units in inventory is matched with the revenue earned from selling the newest units.

For example, if a company purchases 10 units of an item for $5 each, and then purchases another 10 units of the same item for $7 each, under FIFO, the first 10 units sold will be valued at $5 each.