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If inventory costs are falling, a FIFO cost flow assumption will result in ending inventory being...

If inventory costs are falling, a FIFO cost flow assumption will result in ending inventory being a better estimate of the replacement cost of inventory (relative to a LIFO cost flow assumption). True or False and why

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Answer #1

Under FIFO, it is assumed that the oldest inventory is sold first. That is the units of inventory purchased first are sold first. Therefore, under this cost flow assumption, cost of ending inventory includes cost of inventory purchased most recently.

Under LIFO, it is assumed that the newest inventory is sold first. That is the units of inventory purchased latest are sold first. Therefore, under this cost flow assumption, cost of ending inventory includes cost of inventory purchased earliest.

If inventory costs are falling, FIFO cost flow assumption will result in ending inventory being a better estimate of the replacement cost of inventory because under this cost flow assumption, ending inventory cost will include the cost of most recently purchased units.

Thus, the given statement is true.

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