Which method of costing most closely approximates the current cost of inventory on the balance sheet?

The method of costing that most closely approximates the current cost of inventory on the balance sheet is First In First Out (FIFO). This approach assumes that the oldest inventory items are sold first, which means that the remaining inventory on the balance sheet reflects the more recent costs of acquiring those items. In times of rising prices, FIFO results in lower cost of goods sold and higher ending inventory values on the balance sheet, making it a more accurate representation of the current market value of the inventory. This aligns well with the idea that the items remaining in stock are the most recently purchased or produced, thus reflecting the current cost conditions.

In contrast, other methods such as Last In First Out (LIFO) can result in the remaining inventory being valued at older, potentially lower costs, especially when prices are increasing. The Weighted Average Cost method averages out the cost of inventory over the period, providing a less precise reflection of the current market conditions. Specific Identification tracks the actual cost of individual items, which can be accurate but may not represent the broader inventory cost as effectively as FIFO does under normal circumstances.