Which cost-based inventory valuation system would a company prefer if it wanted their inventory valuation on the balance sheet to approximate replacement cost?
A)FIFO
B)LIFO
C)Average cost
D)Specific identification

Question

Quizplus · Accepted Answer

FIFO (First-in, First-out) method assumes that the first items purchased or produced are the first items sold. This method values inventory using the most recent cost, which is closer to replacement cost, giving a more accurate valuation of the company's inventory on the balance sheet. In contrast, LIFO (Last-in, First-out) method uses older costs, distorting the inventory valuation when prices are increasing. Average cost method is an average of all the costs incurred to produce the items, and Specific identification method involves identifying and valuing each item in inventory separately, both of which may not approximate replacement cost.

Which Cost-Based Inventory Valuation System Would a Company Prefer If