Case Study: The XYZ Company's Inventory Valuation Dilemma The XYZ Company is a manufacturing company that has been in operation for several years, producing a range of industrial equipment. Recently, the company's management has encountered a complex accounting issue related to inventory valuation. This situation presents an opportunity to explore accounting theory and research in action. The company has traditionally used the First-In, First-Out (FIFO) Inventory valuation method, which is aligned with the Generally Accepted Accounting Principles (GAAP) in their country. However, the management is contemplating a switch to the Weighted Average Cost method, a move that is permitted under GAAP but has important implications for financial reporting. Key Facts: 1. Inventory Composition: XYZ Company's inventory consists of various components, some of which have experienced significant price fluctuations over the past year. The company purchases these components in varying quantities and at different prices. 2. Market Conditions: in the last year, the prices of certain key inventory components have been highly volatile. Due to supply chain disruptions and geopolitical events, the market prices for some of these components have significantly increased, while others have decreased. Questions: 1. Considering the case study, discuss the accounting theory principles that underpin the choice of inventory valuation methods, such as FIFO and Weighted Average Cost. How do these principles relate to the financial reporting objectives of relevance and faithful representation? 2. Examine the advantages and disadvantages of the FIFO method for XYZ Company in the current market conditions. How does this choice impact the financial statements, particularly in terms of relevance, reliability, and comparability