Which method of inventory valuation assumes that the last items added to inventory are the first sold?

The correct answer is based on the understanding of inventory valuation methods and their implications for financial reporting and tax purposes. The method that assumes that the last items added to inventory are the first to be sold is known as Last-In, First-Out (LIFO). This approach means that when inventory is sold, the costs assigned to the most recently acquired items are recognized as the cost of goods sold (COGS) first.

This is especially relevant in times of rising prices, as it tends to result in higher COGS and lower taxable income compared to methods that assume earlier costs are associated with sales. It can provide a tax advantage by deferring tax payments. Understanding LIFO is crucial because it affects inventory valuation, profit margins, and cash flow.

The other methods, such as First-In, First-Out (FIFO), which assume that the first items added are sold first, and the Average Cost Method, which averages the cost of all items in inventory, operate under different principles and do not reflect the LIFO assumption.