Florida General Contractor Practice Exam

Which method of inventory assumes that the first materials purchased are the first used?

1. FIFO (First In, First Out)

2. LIFO (Last In, First Out)

3. Average Cost Method

4. Specific Identification Method

The correct answer is: FIFO (First In, First Out)

The method of inventory that assumes the first materials purchased are the first used is known as FIFO, which stands for First In, First Out. This approach is based on the principle that the oldest inventory items are sold or used before any newer items. As a result, during periods of rising prices, FIFO typically reports higher inventory values on the balance sheet and lower cost of goods sold (COGS), which can lead to a higher taxable income. This method is particularly beneficial for perishable goods or items with limited shelf life, as it ensures that older stock is used first, minimizing waste. In contrast, LIFO (Last In, First Out) assumes that the most recently purchased items are the first to be sold, which can result in different financial impacts, particularly under inflationary conditions. The Average Cost Method calculates the cost of goods sold based on the average cost of all inventory items available for sale during the period, while the Specific Identification Method tracks the actual cost of each specific item sold. Each of these methods serves different business needs and accounting strategies, but FIFO specifically aligns with the principle of using the oldest inventory first.