Which of the following is true of the FIFO (First-In, First-Out) inventory method?

• A. The most recently purchased goods are the first to be sold.
• B. The earliest goods purchased are the first to be sold.
• C. Cost of goods sold is based on the average cost of all units available for sale.
• D. Ending inventory consists of the oldest costs.

Answer: (B)

Verified step by step guidance

1. Understand the FIFO (First-In, First-Out) inventory method: FIFO assumes that the earliest goods purchased are the first to be sold. This means that the cost of goods sold (COGS) is based on the oldest inventory costs.
2. Analyze the implications of FIFO: Since the oldest inventory costs are used for COGS, the ending inventory will consist of the most recently purchased goods, reflecting the latest costs.
3. Compare FIFO with other inventory methods: Unlike FIFO, methods like LIFO (Last-In, First-Out) assume the most recently purchased goods are sold first, and Average Cost uses the weighted average of all units available for sale.
4. Evaluate the statements provided: The correct answer aligns with the FIFO principle that the earliest goods purchased are the first to be sold. The other statements describe characteristics of LIFO or Average Cost methods, not FIFO.
5. Conclude the reasoning: Based on the FIFO method, the correct statement is 'The earliest goods purchased are the first to be sold,' as this accurately reflects the FIFO inventory flow assumption.