Which inventory accounting method assumes that the oldest inventory items are sold first?

The inventory accounting method that assumes the oldest inventory items are sold first is known as First In First Out, or FIFO. This approach is based on the logic that the items that are acquired first are the ones that will be sold first.

In a FIFO system, the cost of goods sold reflects the cost of the oldest inventory, thus providing a more current valuation of the remaining inventory on hand, which consists of the more recently purchased items. This method is particularly useful in industries where inventory can become obsolete quickly, as it helps in aligning the flow of inventory with actual sales in a manner that reflects the true cost associated with inventory.

FIFO is often preferred during periods of rising prices because it results in lower cost of goods sold and higher taxable income, which can affect financial statements and the perception of financial health for a business. Therefore, understanding FIFO is crucial for accurate inventory management and financial reporting.