Certified Government Financial Manager (CGFM) Practice Exam

The method used to value inventory according to established control methods is FIFO, which stands for "First In, First Out." This inventory valuation approach assumes that the oldest inventory items are sold first before the newer items. Consequently, under FIFO, inventory is accounted for in the order it was purchased, which closely reflects the actual physical flow of goods in many businesses, especially in industries like perishable goods.

FIFO plays a significant role in financial reporting, as it can significantly impact both the cost of goods sold (COGS) and the ending inventory value reported on the financial statements. In an inflationary environment, FIFO typically results in a lower COGS and a higher inventory valuation on the balance sheet compared to the other methods, such as LIFO (Last In, First Out).

By adhering to FIFO, organizations can ensure that they are following more accurate accounting practices that align with established control methods and regulatory compliance, thereby providing better financial insights and decision-making capabilities.