Future Business Leaders of America (FBLA) Business Calculations Practice Test

Which is not a cost method of inventory valuation?

1. FIFO

2. Average cost

3. LIFO

4. Declining balance

The correct answer is: Declining balance

The correct choice is indeed the method that is not a cost method of inventory valuation. FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Average Cost are all recognized methods used to value inventory, each with its own approach to determining the cost of goods sold and ending inventory. FIFO assumes that the earliest goods purchased are the first to be sold, leading to lower cost of goods sold and higher inventory values during periods of inflation. LIFO, on the other hand, assumes that the most recently acquired items are sold first, which can lead to higher cost of goods sold and potentially lower income tax during inflation periods. The Average Cost method calculates a weighted average of all inventory costs to determine the cost of goods sold and the remaining inventory value. In contrast, the Declining Balance method is not related to inventory valuation. It is a method used in depreciation calculations for fixed assets, which allocates higher expenses in the earlier years of an asset's life and reduces those expenses over time. Thus, it does not fit into the context of inventory valuation methods, making it the correct choice for this question.