Which statement is true about FIFO inventory method?

Which statement is true about FIFO inventory method?

• A. FIFO assumes newest costs are sold first.
• B. FIFO assumes oldest costs are sold first.
• C. FIFO uses average cost per unit.
• D. FIFO ignores costs when valuing inventory.

Answer: (B)

FIFO means first in, first out. It assumes the oldest inventory costs are the ones that leave the business when a sale occurs. So the cost of goods sold is based on the oldest purchases, and the ending inventory is valued using the newer costs that are still on hand. This is why the statement that oldest costs are sold first is true. If prices have risen over time, FIFO typically gives lower cost of goods sold and higher ending inventory value because the cheaper, older costs are matched with current sales first while the newer, higher costs remain in inventory. The other statements don’t fit FIFO: selling the newest costs first describes a different method; FIFO does not use an average cost per unit; and FIFO does not ignore costs when valuing inventory—the actual costs of the units sold and remaining are used.

FIFO means first in, first out. It assumes the oldest inventory costs are the ones that leave the business when a sale occurs. So the cost of goods sold is based on the oldest purchases, and the ending inventory is valued using the newer costs that are still on hand. This is why the statement that oldest costs are sold first is true. If prices have risen over time, FIFO typically gives lower cost of goods sold and higher ending inventory value because the cheaper, older costs are matched with current sales first while the newer, higher costs remain in inventory. The other statements don’t fit FIFO: selling the newest costs first describes a different method; FIFO does not use an average cost per unit; and FIFO does not ignore costs when valuing inventory—the actual costs of the units sold and remaining are used.