Which cost method provides the better (1) income statement and (2) statement of financial position valuations, respectively?
A)(1) average and (2) FIFO
B)(1) FIFO and (2) average
C)(1) FIFO and (2) FIFO
D)(1) average and (2) average

Question

Quizplus · Accepted Answer

FIFO provides the better income statement valuation because it matches the most recently purchased inventory to the cost of goods sold. This results in a higher cost of goods sold and a lower net income in periods of rising prices. Average cost provides the better statement of financial position valuation because it results in a more stable inventory value over time. This is because average cost smooths out the effects of price fluctuations.

Which Cost Method Provides the Better (1) Income Statement and (2)