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Inventory Methods

Three methods of inventory accounting are:

1. First In, First Out (FIFO):
·         The cost of inventory first acquired (beginning inventory and early purchases) is assigned to the cost of goods sold for the period.
·         The cost of the most recent purchases is assigned to ending inventory,
2. Last In, First Out (LIFO):
·         The cost of inventory most recently purchased is assigned to the cost of goods sold for the period.
·         The cost of beginning inventory and earlier purchases go to ending inventory.
·         Note that in the United States, companies using LIFO for tax purposes must also use LIFO in their financial statements.
3. Average cost:
·         Under the average cost (weighted average) method, cost per unit is calculated by dividing cost of goods available by total units available. This average cost is used to determine both cost of goods sold and ending inventory.
Inventory Method Comparison:
Method
Assumption
Cost of goods sold consists of…
Ending Inventory consists of …
FIFO
The items first purchased are the first to be sold.
first purchased
most recent purchases
LIFO
The items last purchased are the first to be sold.
last purchased
earliest purchases
Average Cost
Items sold are a mix of purchases
average cost of all items
average cost of all items

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