Question

The three most common inventory cost flow methods are a.FIFO, retail, and weighted average cost. b.FIFO, LIFO, and specific identification. c.FIFO, LIFO, and weighted average cost. d.None of these choices are correct.

Answer 1

Answer: c.FIFO, LIFO, and weighted average cost.

Explanation:

FIFO or the FIRST IN FIRST OUT model is a widely accepted inventory reporting standard by both the United States Generally accepted accounting principles (GAAP) and the International Financial Reporting Standards (IFRS). It works by selling off the earliest inventory before touching new ones. For example, if you buy merchandise on the first of the month and another in the middle of the month and want to sell at the end of the month, you sell the inventory acquired on the first of the month.

LIFO or LAST IN FIRST OUT is another very popular valuation method. It is accepted by United States Generally accepted accounting principles (GAAP) but not by and the International Financial Reporting Standards meaning that it is mostly confined to the United States but is still quite major there. It works by selling off the latest inventory as opposed to the earliest. In the previous example, LIFO would work by selling the merchandise acquired in the middle of the month.

Weighted Average

This is the third most popular. It has been called a compromise between FIFO and LIFO and is accepted by both the US Generally accepted accounting principles (GAAP) and the International Financial Reporting Standards. It works by averaging the costs of all inventory and then recording a standard price for all so that it does not matter whether it is earlier inventory or not.