The LIFO and FIFO methods of inventory costing account for the effects of which factor?

The correct answer is that the LIFO (Last In, First Out) and FIFO (First In, First Out) methods of inventory costing account for the effects of market demand. These methods are essential in determining how inventory costs are assigned to the cost of goods sold and ending inventory, which can significantly impact financial statements, tax liability, and cash flow.

LIFO assumes that the most recently purchased items are the first to be sold, meaning that in times of rising prices, the cost of goods sold reflects the latest, higher prices. This can be beneficial for companies because it reduces taxable income. Conversely, FIFO assumes that the oldest inventory items are sold first, often resulting in lower cost of goods sold and potentially higher taxes, especially in inflationary environments.

Both methods reflect how inventory is managed and sold in response to market demand, including fluctuations in pricing and consumer purchasing behavior. Thus, understanding the application of LIFO and FIFO helps businesses strategically manage their inventory and assess their financial performance accurately depending on market conditions.