CFA Practice Question

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CFA Practice Question

Which inventory method generally results in costs allocated to ending inventory that will approximate current costs?

C. Average cost method
Correct Answer: B

FIFO allocates the most recent costs to inventory.

User Contributed Comments 11

User Comment
myanmar i don not agree, with lifo i have "fresher" costs than with fifo
adidas no myanmar. Fifo gives you "fresher" costs in COGS but lifo gives you "fresher" cost in inventory value.
brimann FIFO more accurate inventory - most recent purchases are still held. LIFO more accurate COGS - most recent purchases sold.
mabrickley I don't understand either, thought the answer would be A
Rivermax First in First out therefore the current inventory is the last in ie more recent inventory cost.
mordja Complexity here is in the wording. At first glance I thought this was a COGS question (income statement) where LIFO would have been the correct answer. But the question actually asks which method will provide the most recent/accurate ending inventory to the balance sheet. Which is obviously FIFO.
RCapistrano I believe that we can assume that prices are "generally" rising unless otherwise stated.

If prices are rising, then FIFO uses the last price to value inventory.
apiccion The key words here are "ending inventory" and "current costs".

With FIFO the ending (unsold) inventory would be the most recent purchases. Therefore, their costs on the BALANCE SHEET most accurately represent current cost of replacement..

If the question had asked for "COGS" and "current cost" then the answer would be LIFO
cwest020 Dont worry about rising or falling prices, if i sell gasoline, using FIFO method, and today is the end of the accounting period... the most recent purchased gasoline will be included in ending inventory. This most recent inventory should have a price closer to the current price. LIFOs ending inventory would be the price of the gasoline i purchased at the beginning of the quarter 3 months ago, could be high or lower but probably not similar to the current price levels.
quanttrader the wording of the question is not so clear in that it leads you to assume they are asking about cogs when in fact they are asking about value of inventory. FIFO gets rid of older inventory and thus value of remaining inventory is current.
vatsal92 Ending inventory will measure at current costs if old stocks are sold, hence FIFO is the correct answer as it sells old stock first.
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