A firm that prepares its financial statements according to US GAAP and uses a periodic inventory system had the following transactions during the year:

The cost of sales(in thousands)is closest to:

A、$5,890 using weighted average.

B、$4,080 using LIFO.

C、$3,850 using FIFO.

【Answer to question 1】C

In a period of rising prices and stable inventory levels,which inventory valuation method will most likely result in the highest inventory turnover ratio,all else being equal?

A、Last-in,first-out(LIFO)

B、Weighted average cost

C、First-in,first-out(FIFO)

【analysis】

A is correct.In a period of rising prices,the most recently purchased units of inventory carry the highest cost.Under the LIFO approach,it is these high-cost units(those that are“last in”)that are transferred to the income statement(“first out”)as cost of goods sold.The lowest-cost units remain on the balance sheet as inventory.With a high cost of goods sold value(numerator)and a low inventory value(denominator),the inventory turnover ratio is highest under LIFO.

B is incorrect.Under the weighted average approach,inventory is transferred to the income statement at a cost that falls somewhere between the lowest cost earlier purchases and the higher cost later purchases.The cost of goods sold value is thus higher than the FIFO value,but lower than the LIFO value.Similarly,the inventory value falls between that of LIFO and FIFO.The inventory turnover ratio also falls in between that of LIFO and FIFO.

C is incorrect.Under the FIFO approach,the lower cost inventory purchased earlier is transferred to the income statement as cost of goods sold.The resulting cost of goods sold value is lower while inventory remains high.As a result,the inventory turnover ratio is low with a lower numerator and higher denominator.