When Prices Are Falling, Valuing Inventory Using the Weighted Average

question 38

Multiple Choice

When prices are falling, valuing inventory using the weighted average cost method rather than FIFO gives:

• A) inventory a higher value but lowers profit.
• B) inventory a lower value and also lowers profit.
• C) both inventory and profit a higher value.
• D) inventory a lower value and profit a higher value.

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Definitions:

Supply-and-Demand

A fundamental economic model that describes how the price and quantity of goods and services are determined in a market based on the amount available (supply) and the desire to purchase (demand).

Equilibrium Output

The level of output where the quantity of goods or services producers are willing to supply equals the quantity consumers are willing to buy, resulting in market equilibrium.

Competitive Firm

A company that operates in a market where there are many buyers and sellers, and it has little control over the market price.

MC Curve

The graphical representation of how the cost to produce an additional unit of a good changes with the production volume.