ACCA Financial Reporting (F7) Practice Exam 2026 – Complete Prep Guide

The commonly used methods for inventory valuation include FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and the weighted average cost method. Each of these methods reflects different approaches to determining the cost of inventory sold and the value of inventory held at the end of an accounting period.

Using FIFO, the cost of the oldest inventory items is assigned to the cost of goods sold first, which can be especially relevant in times of rising prices, as it results in lower cost of goods sold and higher ending inventory value. LIFO, in contrast, assumes that the most recently acquired items are sold first. This can lead to tax benefits in inflationary periods because the cost of goods sold reflects the latest (and typically higher) costs, thus reducing taxable income. The weighted average cost method smooths out price fluctuations over the accounting period by averaging the costs of inventory items available for sale.

These methods are widely accepted and used under various accounting frameworks, including GAAP and IFRS, which further solidifies B as the correct choice. The other options include methods that either are not standard for inventory valuation, or that represent less commonly utilized approaches or concepts, making them less relevant to the primary inventory valuation methods recognized in financial reporting.