Question

Under which method of cost flows in the inventory assumed to be composed of the most recent costs?

A. Average cost
B. Last in, First-out
C. First-in, First-out
D. Weighted average
E. Specific identification

Answer 1

The method of cost flow that assumes inventory is composed of the most recent costs is called Last in, First-out (LIFO). Under the LIFO method, the items most recently added to the inventory are assumed to be sold first.

Step-by-step explanation:

The method of cost flow that assumes inventory is composed of the most recent costs is called Last in, First-out (LIFO). Under the LIFO method, the items most recently added to the inventory are assumed to be sold first.

For example, let's say a store purchases 10 units of a product at different costs: 5 units at $10 each and 5 units at $15 each. If the store sells 8 units, the LIFO method would assume that the 8 units sold are from the most recent batch of 5 units at $15 each, leaving the older 5 units at $10 each in inventory.