Which methods has the most layers of inventory?
A.FIFO and LIFO
B.Average method
C.LIFO
D.FIFO
E.FIFO and Average methods
To determine which method has the most layers of inventory, we need to understand the concept of inventory layers and how each method contributes to them.
Inventory layers refer to the different batches or quantities of inventory that a company holds at different cost levels. When new inventory is purchased or produced, it is added as a separate layer on top of the existing inventory. Different inventory methods treat these layers differently, resulting in variations in the number of layers.
Now let's examine each option:
A. FIFO (First-In, First-Out): This method assumes that the first items purchased are the first ones sold. It means that the oldest inventory layers are considered sold first, while the newest layers remain in stock. FIFO generally results in fewer layers of inventory because it assumes the oldest units are sold first.
B. Average method: This method calculates the average cost of inventory and uses it to determine the value of sold items. It does not create separate layers of inventory, as the cost is averaged across all units. Therefore, the average method does not contribute to additional layers.
C. LIFO (Last-In, First-Out): This method assumes that the last items purchased are the first ones sold. It means that the newest inventory layers are considered sold first, while the older layers remain in stock. LIFO often results in more layers of inventory because it assumes the newest units are sold first.
D. FIFO: We have already discussed this method under option A.
E. FIFO and Average methods: The combination of FIFO and Average methods does not create additional layers of inventory beyond what is created by using FIFO alone. The average method does not contribute any additional layers, so the number of layers remains the same as in option A.
Based on the explanations provided, the option C. LIFO is most likely to have the highest number of layers of inventory.