Which inventory cost flow assumption generally best matches the physical flow of inventory in most businesses?

• A. First-In, First-Out (FIFO)
• B. Weighted Average Cost
• C. Specific Identification
• D. Last-In, First-Out (LIFO)

Answer: (A)

Verified step by step guidance

1. Understand the concept of inventory cost flow assumptions: These are methods used to allocate costs to inventory and cost of goods sold. They do not necessarily reflect the actual physical movement of goods but are accounting methods to value inventory.
2. Review the First-In, First-Out (FIFO) method: FIFO assumes that the oldest inventory items (first purchased) are sold first. This often aligns with the physical flow of inventory in businesses where older items are sold before newer ones, such as perishable goods or items with expiration dates.
3. Examine the Weighted Average Cost method: This method calculates the cost of inventory based on the average cost of all items available for sale during the period. It does not directly match the physical flow of inventory but provides a simplified approach to cost allocation.
4. Understand the Specific Identification method: This method tracks the actual cost of each individual item in inventory. It is typically used for unique or high-value items, such as cars or jewelry, where the physical flow can be directly identified.
5. Review the Last-In, First-Out (LIFO) method: LIFO assumes that the most recently purchased inventory items are sold first. This method is less likely to match the physical flow of inventory in most businesses, as older items are usually sold first in practice.