Identify the Inventory Valuation Method That Is Being Described for Each

question 77

Essay

Identify the inventory valuation method that is being described for each situation below. In all cases, assume a period of rising prices. Use the following to identify the inventory valuation method:
$\begin{array}{|l|l|}\hline \text { FIFO } & \text { First in, first out } \\\hline \text { LIFO } & \text { Last in, first out } \\\hline \text { SI } & \text { Specific identification } \\\hline \text { WA } & \text { Weighted average } \\\hline\end{array}$ a. The method that can only be used if each inventory item can be matched with a specific purchase and its invoice.
b. The method that will cause the company to have the lowest income taxes.
c. The method that will cause the company to have the lowest cost of goods sold.
d. The method that will assign a value to inventory that approximates its current cost.
e. The method that will tend to smooth out erratic changes in costs.

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Definitions:

Taxpayer

An individual or entity legally obligated to pay taxes to a governmental authority, such as the IRS.

Section 1231

A tax provision that allows for the favorable tax treatment of gains on the sale or exchange of certain types of property used in a business.

Trade or Business

An activity carried out for the purpose of earning income or profit, involving regularity and continuity in operations.

Security

A financial instrument representing an ownership position in a publicly-traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option.