Question

A company just starting business made the following four inventory purchases in June:

a) Record these transactions under the cash-basis accounting method
b) Use the average cost method for inventory valuation
c) Apply the first-in, first-out (FIFO) method for inventory valuation
d) Utilize the last-in, first-out (LIFO) method for inventory valuation

Answer 1

Under the cash-basis accounting method, transactions are recorded when cash is received or paid. The average cost method calculates the weighted average cost of inventory purchases. FIFO assumes the oldest inventory is sold first, while LIFO assumes the newest inventory is sold first.

Step-by-step explanation:

Under the cash-basis accounting method, transactions are recorded when cash is received or paid. So, in this case, the four inventory purchases made in June would be recorded when cash is exchanged for the goods.Using the average cost method for inventory valuation, you would calculate the weighted average cost of all the inventory purchases. This average cost would then be used to value the inventory.With the first-in, first-out (FIFO) method, the inventory that was purchased first (oldest) would be sold first. This means that the cost of the oldest inventory would be used to value the inventory on hand.The last-in, first-out (LIFO) method assumes that the newest inventory is sold first. Therefore, the cost of the most recent inventory purchases would be used to value the inventory.