Answer to Question #243253 in Management for Saamith

Question

2.“Valuing inventories in an inflationary situation, First In First Out (FIFO) method produces more 

favourable performance than to a company that applies Weighted Average Cost (WAC) method.” 

Do you agree? Comment.

Answer 1

First In, First Out (FIFO) is a system of asset management and valuation in which the assets that are generated or acquired first are sold, used, or disposed of first. For tax purposes, FIFO assumes that the assets with the oldest expenses are included in the cost of goods sold in the income statement. When inventory items are so entangled that assigning a precise cost to an individual unit becomes difficult, the weighted average method, which is primarily used to allocate the average cost of production to a certain product, is most usually used. When the inventory items in question are similar to one another, this is typically the case. Additionally, this strategy implies that a retailer sells all of its stock at the same time.