Understanding Inventory Valuation Methods

What does LIFO stand for in inventory management?

• Last In, First Out

• Last In, Last Out

• First In, Last Out

• Last Out, First In

What is the primary advantage of using the AVCO method?

• It allows for easier tracking of obsolete inventory.

• It reduces the overall cost of goods sold.

• It simplifies the inventory management process.

• It provides a more accurate reflection of current inventory costs.

In which scenario would LIFO be more beneficial for a company?

• When inventory costs are stable.

• When the company has excess inventory.

• When inventory costs are rising.

• When inventory costs are decreasing.

What is the formula for calculating the average cost in the AVCO method?

• Average Cost = Total Cost of Inventory / Total Units Available

• Average Cost = Total Cost of Inventory - Total Units Available

• Average Cost = Total Cost of Inventory + Total Units Available

• Average Cost = Total Revenue / Total Units Sold

Which inventory method is most commonly used for perishable goods?

• Specific Identification Method

• Weighted Average Cost (WAC)

• Last-In, First-Out (LIFO)

• First-In, First-Out (FIFO)

What are the key differences between LIFO and FIFO?

• LIFO and FIFO are both methods for calculating tax deductions on inventory.

• LIFO prioritizes the latest inventory for sale, whereas FIFO prioritizes the oldest inventory.

• LIFO sells the oldest inventory first, while FIFO sells the newest inventory first.

• FIFO is used for perishable goods, while LIFO is used for non-perishable goods.

Why might a company choose to use the FIFO method?

• To increase inventory costs and maximize spoilage.

• To align inventory management with the natural flow of goods and reduce spoilage.

• To ensure that older products are sold last.

• To simplify accounting by ignoring inventory flow.

How does the choice of inventory method affect cash flow?

• The choice of inventory method affects cash flow by influencing COGS and taxable income.

• It has no effect on cash flow.

• It only affects inventory valuation.

• It determines the selling price of products.

What is the main disadvantage of using the LIFO method?

• It ensures consistent cash flow.

• It can simplify inventory management.

• It allows for easier tracking of inventory costs.

• It can lead to inflated profits and tax liabilities.

In what situations is the AVCO method preferred over LIFO and FIFO?

• AVCO is preferred in stable cost environments.

• AVCO is preferred in fluctuating cost environments and for tax benefits.

• AVCO is the only method that allows for real-time inventory tracking.

• AVCO is used exclusively for inventory valuation.