Company A's line of credit at the bank is based on the dollar amount of inventory on hand.Each month the bank adjusts the line of credit based on the inventory amount provided by the company.If prices are rising which cost flow assumption would management most likely prefer?
A)FIFO
B)Net realizable value
C)Average cost
D)Specific identification

Question

Quizplus · Accepted Answer

Under the FIFO (first-in, first-out) cost flow assumption, the oldest inventory is assumed to be sold first. This means that the cost assigned to inventory on hand will reflect the most recent, and therefore the highest, prices paid for inventory. As prices are rising, this will result in a higher value of inventory on hand and thus a higher line of credit from the bank, which is based on the dollar amount of inventory. Therefore, management would most likely prefer to use the FIFO cost flow assumption in order to maximize their line of credit.

Company A's Line of Credit at the Bank Is Based