What inventory costing method uses the price of merchandise purchased first to determine the cost of goods sold?

The correct choice is the method that takes into account the cost of the oldest inventory items when calculating the cost of goods sold. This is known as the First-in, First-out (FIFO) method. Under FIFO, it is assumed that the items that were purchased first are the ones sold first, which directly affects financial reporting, especially in times of inflation or fluctuating prices.

When a company uses FIFO, it reflects the cost of the first items purchased in its cost of goods sold. This approach can lead to lower cost of goods sold in an inflationary environment because the older, usually less expensive inventory costs are matched against current revenues. Consequently, this can result in higher net income and, potentially, higher tax liabilities during periods of rising prices.

In contrast, other inventory costing methods operate under different assumptions or calculations. The last in, first out (LIFO) method assumes that the most recently acquired items are sold first, which could lead to higher cost of goods sold in an inflation scenario. The weighted-average method calculates an average cost for all inventory items, which smooths out price fluctuations but doesn't track inventory costs as closely as FIFO. The specific identification method tracks the actual cost of specific individual items, which can be practical for unique or high