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Cornerstones of Financial Accounti...
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Cornerstones of Financial Accounti...
Which method results in a more realistic amount for income because it matches the most current costs against revenue?
a. FIFO
b. Average cost
c. Specific identification
d. LIFO
Concept introduction:
FIFO method:
FIFO Stands for First In First Out. Under this method, the units purchased first are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the latest units purchased.
LIFO method:
LIFO Stands for Last In First Out. Under this method, the latest units purchased are assumed to be sold first and cost of goods sold is calculated accordingly. The ending inventory in the method includes the oldest units purchased.
Specific identification method:
Under this method the cost of goods sold and ending inventory units are identifiable and the cost is calculated accurately for each unit sold and in the inventory.
Weighted Average method:
Under this method, the cost per unit of the inventory is calculated as weighted average cost per unit and the cost of goods sold and inventory is calculated with the help of weighted average cost per unit.
To choose:
The correct method that results in a more realistic amount of income because it matches the most current costs against revenue.
Explanation for Correct answer:
d. LIFO method results in a more realistic amount of income because it matches the most current costs against revenue.
Hence this is the correct option.
Explanation for incorrect answers:
a. LIFO method results in a more realistic amount of income because it matches the most current costs against revenue...
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