In the context of periodic inventory systems, what does FIFO refer to?

• A. First-In, First-Out: The most recently purchased goods are the first to be sold.
• B. First-In, First-Out: The earliest goods purchased are the first to be sold.
• C. First-In, First-Out: Inventory is recorded at historical cost regardless of sales.
• D. First-In, First-Out: Inventory is valued at the average cost of all goods available for sale.

Answer: (B)

Verified step by step guidance

1. Understand the concept of FIFO (First-In, First-Out) in the context of inventory management. FIFO is a method used to determine the cost of goods sold and the value of ending inventory under a periodic inventory system.
2. Recognize that FIFO assumes the earliest goods purchased or produced are the first to be sold. This means inventory is sold in the order it was acquired, starting with the oldest items.
3. Clarify that FIFO does not involve valuing inventory at historical cost regardless of sales, nor does it use average cost for valuation. These are characteristics of other inventory methods, such as specific identification or weighted average cost.
4. Note that FIFO is particularly useful in times of rising prices, as it results in lower cost of goods sold and higher ending inventory values compared to other methods like LIFO (Last-In, First-Out).
5. Understand that FIFO is widely used because it aligns with the physical flow of goods in many businesses, ensuring that older inventory is sold first to prevent obsolescence or spoilage.