Certified Government Financial Manager (CGFM) Practice Exam

The first-in, first-out (FIFO) method of valuing inventory is preferred in situations where spoilage or obsolescence is a concern because it aligns the oldest inventory costs with current sales, reducing the risk of holding outdated or spoiled stock. Under FIFO, the goods that were purchased or produced first are sold first, which means that the remaining inventory reflects more recent purchases. This method ensures that any perishable or time-sensitive items are sold while they are still viable, reducing waste and potential losses due to spoilage.

In contrast, the last-in, first-out (LIFO) method can lead to older inventory remaining unsold, which may increase the risk of obsolescence and spoilage. The average cost method smooths out cost fluctuations but does not prioritize the sale of older stock, which may also lead to potential issues during inventory turnover. Standard costing focuses on predetermined costs and may not reflect real-time inventory value, making it less effective in managing spoilage or obsolescence concerns. Therefore, FIFO is the most logical choice for inventory management in contexts where the integrity of perishable goods is critical.