Canadian Securities Course (CSC) Level 1 Practice Exam

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How do you use the weighted average method to calculate inventory?

Takes the first items purchased as the first to be sold.
Calculates inventory based on the latest purchase price.
Calculates the average cost of goods purchased on a per unit basis.
Values inventory based on its net present value.

The correct answer is: Calculates the average cost of goods purchased on a per unit basis.

The weighted average method to calculate inventory combines the cost of goods available for sale and divides that by the total number of units available for sale, resulting in an average cost per unit. This approach ensures that the cost of inventory reflects the average expense of items purchased over a given period, which can provide a more stable assessment of inventory value, especially in environments where prices fluctuate. When calculating the cost of unsold inventory using this method, each unit of inventory is valued equally based on the overall average cost rather than the specific costs associated with individual batches of inventory. This is particularly useful for businesses with large quantities of similar items, as it simplifies the accounting process and smooths out price variances over time.