Name and describe three common inventory valuation methods.

Name and describe three common inventory valuation methods.

• A. FIFO (oldest costs flow into cost of goods sold); Weighted Average Cost (average cost per unit); Specific Identification (cost allocated to each item). LIFO is not permitted under IFRS.
• B. LIFO is permitted under IFRS; FIFO and Specific Identification are not used.
• C. Only FIFO is used for all inventories.
• D. Specific Identification is never used in practice.

Answer: (A)

At the heart of inventory accounting is how cost is allocated to the goods you’ve sold and the goods you still have. The three common methods are FIFO, Weighted Average Cost, and Specific Identification. FIFO assumes the oldest units are sold first. This means the cost of goods sold reflects earlier, typically lower costs, while the remaining inventory carries more recent costs. It’s straightforward and widely used, and IFRS allows it. Weighted Average Cost blends all costs available for sale into a single average cost per unit. When you sell units, you multiply the number sold by that average cost to get the cost of goods sold, and ending inventory is valued at the same average cost. This smooths out price fluctuations and is practical for large quantities of similar items. Specific Identification matches the actual cost of each individual item sold, which is exact when items are distinct and trackable—like certain high-value or unique items (cars, jewelry, customized goods). Ending inventory is valued at the exact costs of the items still on hand. LIFO is not permitted under IFRS, so statements claiming it’s allowed are incorrect. The other options misstate the common practice, as FIFO, Weighted Average, and Specific Identification are all valid and used methods.

At the heart of inventory accounting is how cost is allocated to the goods you’ve sold and the goods you still have. The three common methods are FIFO, Weighted Average Cost, and Specific Identification.

FIFO assumes the oldest units are sold first. This means the cost of goods sold reflects earlier, typically lower costs, while the remaining inventory carries more recent costs. It’s straightforward and widely used, and IFRS allows it.

Weighted Average Cost blends all costs available for sale into a single average cost per unit. When you sell units, you multiply the number sold by that average cost to get the cost of goods sold, and ending inventory is valued at the same average cost. This smooths out price fluctuations and is practical for large quantities of similar items.

Specific Identification matches the actual cost of each individual item sold, which is exact when items are distinct and trackable—like certain high-value or unique items (cars, jewelry, customized goods). Ending inventory is valued at the exact costs of the items still on hand.

LIFO is not permitted under IFRS, so statements claiming it’s allowed are incorrect. The other options misstate the common practice, as FIFO, Weighted Average, and Specific Identification are all valid and used methods.