When using the FIFO (First-In, First-Out) method for inventory valuation, which of the following statements is correct?

• A. Inventory is valued at the most recent purchase price only.
• B. The most recently purchased goods are the first to be recognized as cost of goods sold.
• C. All inventory items are assigned the same average cost.
• D. The earliest goods purchased are the first to be recognized as cost of goods sold.

Answer: (D)

Verified step by step guidance

1. Understand the FIFO (First-In, First-Out) inventory valuation method: FIFO assumes that the earliest goods purchased or produced are the first to be sold or used. This method is commonly used in accounting to match the cost of goods sold with the oldest inventory costs.
2. Clarify the key principle of FIFO: Under FIFO, the cost of goods sold (COGS) is based on the cost of the oldest inventory items, while the ending inventory is valued using the cost of the most recent purchases.
3. Analyze the incorrect options: The statement 'Inventory is valued at the most recent purchase price only' is incorrect because FIFO values ending inventory at the most recent purchase price, but not exclusively. The statement 'The most recently purchased goods are the first to be recognized as cost of goods sold' is incorrect because this describes the LIFO (Last-In, First-Out) method. The statement 'All inventory items are assigned the same average cost' is incorrect because this describes the Weighted Average Cost method.
4. Identify the correct statement: The correct statement is 'The earliest goods purchased are the first to be recognized as cost of goods sold,' which aligns with the FIFO method's principle of selling or using the oldest inventory first.
5. Summarize the concept: FIFO ensures that the cost of goods sold reflects the cost of the oldest inventory, while the ending inventory reflects the cost of the most recent purchases. This method is particularly useful in periods of rising prices, as it results in lower COGS and higher net income compared to LIFO.