Question

Generally, if a company wants its inventory cost flows to be the same as the inventory's physical flows, what inventory method would it use?

A- FIFO
B- LIFO

Answer 1

If a company wants its inventory cost flows to be the same as the inventory's physical flows, it would use the A) FIFO (First-In, First-Out) inventory method.

Step-by-step explanation:

If a company wants its inventory cost flows to be the same as the inventory's physical flows, it would use the FIFO (First-In, First-Out) inventory method. FIFO assumes that the first items purchased are the first ones sold or used, which aligns with the physical flow of goods. By using this method, the cost of inventory reflects the most recent prices paid for the items still in stock.

For example, let's say a company sells two products: A and B. Using the FIFO method, if the company first purchased product A and then product B, they would sell product A before selling product B.

On the other hand, the LIFO (Last-In, First-Out) inventory method assumes that the last items purchased are the first ones sold or used. This method may result in a cost of goods sold (COGS) calculation that differs from the physical flow of inventory.