Question

When reporting income, which method is banned under the international accounting rules?

a) FIFO (First-In, First-Out)
b) LIFO (Last-In, First-Out)
c) Weighted Average Cost
d) Specific Identification

Answer 1

Under IFRS, the Last-In, First-Out (LIFO) method is banned for reporting income because it does not accurately reflect the actual flow of inventory and can be used to manipulate earnings. FIFO, Weighted Average Cost, and Specific Identification are accepted methods.

Step-by-step explanation:

Under International Financial Reporting Standards (IFRS), the Last-In, First-Out (LIFO) inventory costing method is prohibited. The International Accounting Standards Board (IASB) does not allow LIFO for inventory valuation because it may not accurately reflect the actual flow of inventory and can manipulate earnings. While LIFO is banned under IFRS, it's still accepted under U.S. Generally Accepted Accounting Principles (GAAP).

Other methods like First-In, First-Out (FIFO), Weighted Average Cost, and Specific Identification are acceptable under IFRS. FIFO assumes that the oldest inventory items are sold first, which may more closely align with the actual physical flow of goods. The Weighted Average Cost method takes the average cost of all the items in inventory to value goods sold and ending inventory. Specific Identification is used when tracking individual items, especially if they are high value or unique in some way.