Which inventory valuation method assumes that the first units purchased are the first ones sold?

Which inventory valuation method assumes that the first units purchased are the first ones sold?

• A. Last-in, first-out (LIFO) method
• B. First-in, first-out (FIFO) method
• C. Weighted average method
• D. Specific identification method

Answer: (B)

The main idea here is how costs are assigned to the goods sold and the remaining inventory. The first-in, first-out approach assumes that the oldest units you purchased are the ones that get sold first. So, the cost of goods sold comes from the oldest costs, while the ending inventory is valued using the most recent costs. For clarity, imagine you buy 10 units at $5 and then 10 units at $7. If you sell 12 units, under this method you would match the first 10 units at $5 to cost of goods sold, and the next 2 units at $7. The remaining 8 units would be valued at $7 each. This illustrates why this method is described as selling the oldest stock first. Other methods allocate costs differently. LIFO would use the most recent purchases for cost of goods sold, not the oldest. The weighted average method blends all costs into a single average cost per unit. The specific identification method tracks the exact cost of each individual item sold. FIFO aligns with the concept that older inventory is depleted first, which is why it’s the best fit for the statement.

The main idea here is how costs are assigned to the goods sold and the remaining inventory. The first-in, first-out approach assumes that the oldest units you purchased are the ones that get sold first. So, the cost of goods sold comes from the oldest costs, while the ending inventory is valued using the most recent costs.

For clarity, imagine you buy 10 units at $5 and then 10 units at $7. If you sell 12 units, under this method you would match the first 10 units at $5 to cost of goods sold, and the next 2 units at $7. The remaining 8 units would be valued at $7 each. This illustrates why this method is described as selling the oldest stock first.

Other methods allocate costs differently. LIFO would use the most recent purchases for cost of goods sold, not the oldest. The weighted average method blends all costs into a single average cost per unit. The specific identification method tracks the exact cost of each individual item sold. FIFO aligns with the concept that older inventory is depleted first, which is why it’s the best fit for the statement.