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Analyze the different inventory valuation methods discussed in the textbook. Based on your analysis, recommend the most accurate valuation method that reflects current economic conditions. Provide a rationale for your recommendation.
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The different inventory valuation methods discussed in the textbook are First -in, First Out (FIFO), Last –In, First Out (LIFO), and Average Cost.
- First- In, First Out method assumes that the first goods are sold first, but this is not always the case. This method coincides with the flow of merchandise. In using this method, the company’s get there cost of ending inventory by working backward beginning with recent purchase until all inventory has been accounted for.
- Last-In, First- Out method believes the last good purchased will be sold first. This method does not match the physical flow of inventory. In this method the last goods purchases are believe to be first to govern cost of inventory sold and ending inventory is based on price of oldest unit bought.
- Average Cost is the method where the cost is averaged to find the cost of goods sold and the ending inventory. The weighted average unit cost is applied to the units on hand to get the ending inventory.