The correct answer is: A. FIFO
FIFO stands for First In, First Out. It is a cost flow assumption that assumes that the first goods that are purchased are also the first goods that are sold. This means that the cost of goods sold is based on the cost of the oldest inventory items.
LIFO stands for Last In, First Out. It is a cost flow assumption that assumes that the last goods that are purchased are also the first goods that are sold. This means that the cost of goods sold is based on the cost of the newest inventory items.
HIFO stands for Highest In, First Out. It is a cost flow assumption that assumes that the highest-priced goods that are purchased are also the first goods that are sold. This means that the cost of goods sold is based on the cost of the most expensive inventory items.
Normal average is a cost flow assumption that uses a weighted average of the cost of the beginning inventory and the cost of goods purchased during the period. This means that the cost of goods sold is based on an average of the cost of all of the inventory items.
Under AS-2, the cost formula acceptable for inventory valuation is FIFO. This is because FIFO is the most conservative cost flow assumption. It results in the lowest possible cost of goods sold and the highest possible ending inventory value. This is important because it affects the company’s net income and its tax liability.