The correct option is B. FIFO (First-In, First-Out). Explanation of the Correct Answer FIFO (First-In, First-Out) is an inventory valuation method that operates on the principle that the oldest inventory items are sold first. This means that when a company sells its products, it recognizes the cost of the oldest items in inventory as the cost of goods sold (COGS) for that period. How FIFO Works:

1. Inventory Flow: Under FIFO, the inventory is assumed to flow in the order it was purchased. For example, if a company has purchased inventory in the following order:
2. 100 units at $10 each (oldest)
3. 100 units at $12 each
4. 100 units at $15 each (newest)
5. Cost of Goods Sold Calculation: If the company sells 150 units, the cost of goods sold would be calculated as follows:
6. The first 100 units sold would come from the oldest inventory (100 units at $10 each = $1,000).
7. The next 50 units would come from the second batch (50 units at $12 each = $600).
8. Therefore, the total COGS for the sale of 150 units would be $1,000 + $600 = $1,600.
9. Impact on Financial Statements: FIFO can lead to lower COGS during periods of rising prices, which results in higher net income and higher taxes. This is because the older, cheaper costs are matched against current revenues.

Why Other Options Are Incorrect A. Weighted Average Cost: - This method averages the cost of all inventory items available for sale during the period and uses this average cost to calculate COGS. It does not prioritize older inventory; instead, it smooths out price fluctuations over time. Therefore, it does not align with the FIFO principle of selling the oldest items first. C. LIFO (Last-In, First-Out): - LIFO assumes that the most recently purchased inventory items are sold first. This means that the newest costs are recognized as COGS, which is the opposite of FIFO. In times of rising prices, LIFO results in higher COGS and lower net income compared to FIFO. D. Specific Identification: - This method tracks the actual cost of each specific item sold. It is typically used for unique or high-value items (like cars or real estate) rather than for large quantities of similar items. It does not follow the FIFO principle of assuming the oldest items are sold first. Summary of Key Points

• FIFO assumes the oldest inventory is sold first, impacting COGS and net income.
• Weighted Average Cost averages costs and does not prioritize older inventory.
• LIFO sells the newest inventory first, contrary to FIFO.
• Specific Identification tracks individual item costs and is not based on inventory flow assumptions.

Revision Summary

• FIFO recognizes the cost of the oldest inventory first.
• It can lead to higher net income in inflationary periods.
• LIFO and Weighted Average Cost are alternative methods with different implications.
• Specific Identification is used for unique items, not for general inventory flow.