Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 233

Which of the following represents an inventory costing technique that can be manipulated by management to boost net income by selling units purchased at a low cost?

Answer options

• A. First-in first-out method (FIFO)
• B. Last-in first-out method (LIFO)
• C. Specific identification method
• D. Average-cost method

Correct answer: A

Explanation

The First-in first-out method (FIFO) allows companies to sell older inventory first, which can result in recognizing lower costs of goods sold when prices are rising, thus boosting net income. In contrast, the Last-in first-out method (LIFO) would typically lead to higher costs, reducing net income. The Specific identification method tracks individual items, and the Average-cost method smooths cost fluctuations, neither of which inherently allow for manipulation in the same way as FIFO.