Question

How closely does the ending inventory amount reflect replacement cost (current market cost

Answer 1

Ending Inventory amount will be based on the method of valuation of inventory adopted.

FIFO Method: FIFO refers to First In First Out. It means the goods prchased earlier will be sold first and the most recent purchases will be in the Enidng inventory which reflect the replacement or current costs.

LIFO method: LIFO method is reversal to the FIFO method where the inventory purchased recently are sold whcih have the value of current cost while the Ending inventory reflects the historica costs which are purchased initially.

Hence, if FIFO method is adopted the value of the ending inventory will be equal to the replacement costs or the current market price based on the quantity of ending inventory remaining from the earier and the recent purchases.