The LIFO method of inventory valuation bases the cost of goods sold on the cost of:

• A. the oldest inventory items on hand
• B. the inventory items with the highest purchase price
• C. an average of all inventory costs
• D. the most recently purchased inventory items

Answer: (D)

Verified step by step guidance

1. Understand the concept of LIFO (Last-In, First-Out): LIFO is an inventory valuation method where the most recently purchased inventory items are assumed to be sold first, leaving the older inventory items as ending inventory.
2. Compare LIFO with other inventory valuation methods: For example, FIFO (First-In, First-Out) assumes the oldest inventory items are sold first, while the weighted average method calculates an average cost for all inventory items.
3. Analyze the cost flow assumption under LIFO: The cost of goods sold (COGS) is based on the cost of the most recent purchases, which can impact financial statements during periods of inflation or deflation.
4. Consider the implications of LIFO: During inflation, LIFO typically results in higher COGS and lower taxable income compared to FIFO, as the most recent (and higher) costs are matched against revenue.
5. Apply the concept to the problem: Since LIFO bases the cost of goods sold on the cost of the most recently purchased inventory items, this aligns with the correct answer provided in the problem.