University of Central Florida (UCF) ACG3173 Accounting for Decision-Makers Exam 2 Practice

The chosen answer identifies "Diminishing Balance" as not being a method of inventory costing, which is correct. In the context of inventory accounting, there are several established methods to determine how costs are allocated to inventory, and they primarily focus on how an organization values its inventory for Cost of Goods Sold calculations.

Specific Identification, FIFO (First-In, First-Out), and LIFO (Last-In, First-Out) are all widely recognized methods that reflect the flow of inventory costs.

- Specific Identification means that each specific item of inventory is marked with its actual cost. This method is especially useful for items that are unique or of high value, allowing precise tracking of inventory costs.

- FIFO assumes that the oldest inventory items are sold first. This approach aligns with the natural flow of goods in many industries, where older stock is sold before newer stock.

- LIFO assumes that the newest inventory items are sold first, which can be beneficial for tax purposes in times of rising prices because it matches the latest costs against current revenues.

On the other hand, the term "Diminishing Balance" relates to a method of depreciation for accounting purposes, not inventory costing. It refers to an approach where an asset's value is reduced by a fixed percentage over