**Step 1: Inventory Management Practices**

Inventory management involves the systematic control and monitoring of a company's goods and materials. Effective inventory management ensures that the right amount of stock is available at the right time, preventing stockouts or overstock situations.

- **Demand Forecasting:** Companies use historical data and market trends to forecast demand accurately. This enables them to maintain optimal inventory levels, reducing the carrying costs associated with excess inventory.

- **ABC Analysis:** Inventory items are often categorized into A, B, and C classes based on their importance and value. A-class items, representing high-value items, receive more attention in terms of monitoring and control compared to B and C-class items.

**Step 2: Valuation Methods**

Valuation methods determine how the cost of inventory is assigned to the goods sold and those remaining in stock. Different valuation methods impact financial statements and tax liabilities.

- **FIFO (First-In, First-Out):** FIFO assumes that the first items added to inventory are the first ones sold. This method is particularly suitable for businesses with perishable goods or those subject to rapid price changes.

- **LIFO (Last-In, First-Out):** LIFO assumes that the most recently added items are the first ones sold. While this method may be tax advantageous in certain jurisdictions, it can result in distorted financial statements during periods of inflation.

**Step 3: Implications for Financial Reporting**

- **Lower of Cost or Market (LCM):** The lower of cost or market rule requires companies to value their inventory at the lower of its cost or current market replacement cost. This ensures that inventory is not overstated on the balance sheet.

- **Impact on Financial Ratios:** The choice of inventory valuation method can influence financial ratios such as gross profit margin and net income. FIFO tends to result in higher profits during inflationary periods, while LIFO may lead to lower profits.

**Fill in the Blanks Question:** The **______** method assumes that the most recently added items are the first ones sold, while the **______** method assumes that the first items added to inventory are the first ones sold. The lower of cost or market rule ensures that inventory is valued at the **______** of its cost or current market replacement cost.

A) LIFO, FIFO, lower

B) FIFO, LIFO, higher

C) LIFO, FIFO, higher

D) FIFO, LIFO, lower