Question

Identify the inventory costing method best described by each of the following separate statements. Assume a period of increasing costs.

______1. Yields a balance sheet inventory amount often markedly less than its replacement cost.

Short answer

LIFO method.

Step-by-step solution

Definition of Replacement Cost

The amount of money that a business entity must pay to replace an asset is the replacement cost. The cost of a business organization to replace any essential asset of the organization can be termed as replacement cost. This is the additional cost of replacing an asset after the depreciation reserve has been used up.

Fill in the Blank

LIFOYields a balance sheet inventory amount often markedly less than its replacement cost.

Explanation: The LIFO method allocates the recent inventory cost to the cost of goods sold and reports the cost of the oldest inventory on the balance sheet. Therefore, the value of ending inventory reported on the balance sheet is lower than its replacement cost.