Which inventory valuation method matches current costs with current revenues most effectively?
Practice Questions
1 question
Q1
Which inventory valuation method matches current costs with current revenues most effectively?
FIFO
LIFO
Weighted Average
Specific Identification
LIFO matches current costs with current revenues most effectively during inflationary periods.
Questions & Step-by-step Solutions
1 item
Q
Q: Which inventory valuation method matches current costs with current revenues most effectively?
Solution: LIFO matches current costs with current revenues most effectively during inflationary periods.
Steps: 6
Step 1: Understand what inventory valuation methods are. These are ways to calculate the value of inventory a company has.
Step 2: Learn about LIFO, which stands for 'Last In, First Out.' This means that the most recently purchased items are sold first.
Step 3: Recognize that during inflation, prices of goods increase over time.
Step 4: Realize that when a company uses LIFO during inflation, it sells the more expensive, recently purchased items first.
Step 5: Understand that by selling these higher-cost items first, the company matches current costs (higher prices) with current revenues (sales at higher prices).
Step 6: Conclude that LIFO is effective in matching current costs with current revenues during inflationary periods.
