Under the LIFO inventory method, which units are assumed to be sold first when calculating Cost of Goods Sold?

• A. The oldest units in inventory
• B. The most recently purchased units
• C. The units with the highest cost
• D. A random selection of units

Answer: (B)

Verified step by step guidance

1. Understand the concept of LIFO (Last-In, First-Out): Under the LIFO inventory method, the assumption is that the most recently purchased inventory items are sold first when calculating the Cost of Goods Sold (COGS). This is opposite to FIFO (First-In, First-Out), where the oldest inventory items are sold first.
2. Analyze the options provided: The question asks which units are assumed to be sold first under LIFO. The options include 'The oldest units in inventory,' 'The most recently purchased units,' 'The units with the highest cost,' and 'A random selection of units.'
3. Eliminate incorrect options: Under LIFO, the oldest units in inventory are not sold first, so this option is incorrect. Similarly, LIFO does not involve random selection or prioritizing units with the highest cost, so these options can also be eliminated.
4. Focus on the correct option: The most recently purchased units are sold first under LIFO. This aligns with the principle of LIFO, where the last items added to inventory are the first to be removed for COGS calculation.
5. Apply this understanding to inventory accounting: When using LIFO, the cost of goods sold reflects the cost of the most recent purchases, while the ending inventory reflects the cost of older inventory items. This method can impact financial statements, especially during periods of inflation.