Which inventory valuation method assumes newer items are used before older items?

Which inventory valuation method assumes newer items are used before older items?

• A. FIFO
• B. Weighted average
• C. Latest purchase price
• D. LIFO

Answer: (D)

This question tests how the method chosen for tracking inventory costs determines which prices flow into cost of goods sold versus ending inventory. Under Last-In, First-Out, the newest items are assumed to be used first. That means the costs of the most recently purchased units are the ones that hit the cost of goods sold first, while the older, earlier costs remain in ending inventory. If prices are rising, this shifts higher costs into COGS and leaves older, lower costs in ending inventory, which can reduce reported profit in the short term. For contrast, FIFO would assign older costs to COGS and keep newer costs in ending inventory, and the weighted average method uses a blended average cost for both COGS and ending inventory. The “latest purchase price” isn’t a standard inventory cost-flow method. So the statement that newer items are used before older items aligns with the Last-In, First-Out approach.

This question tests how the method chosen for tracking inventory costs determines which prices flow into cost of goods sold versus ending inventory. Under Last-In, First-Out, the newest items are assumed to be used first. That means the costs of the most recently purchased units are the ones that hit the cost of goods sold first, while the older, earlier costs remain in ending inventory.

If prices are rising, this shifts higher costs into COGS and leaves older, lower costs in ending inventory, which can reduce reported profit in the short term. For contrast, FIFO would assign older costs to COGS and keep newer costs in ending inventory, and the weighted average method uses a blended average cost for both COGS and ending inventory. The “latest purchase price” isn’t a standard inventory cost-flow method.

So the statement that newer items are used before older items aligns with the Last-In, First-Out approach.