In this lesson we're going to look at all three methods with examples.
LIFO inventory, or last in first out, assumes that the last goods purchased are the first goods used or sold. The LIFO inventory valuation method is a common method for assigning inventory cost. The three other main inventory valuation methods are FIFO, average cost, and specific identification.
FIFO, or first in first out, assumes that the first goods purchased are the first goods used or sold. Why Use Cost Flow Assumptions? Companies can use cost flow assumptions regardless of the Lifo accounting physical flow of inventory.
Inventory is recorded at historical cost, and then subject to an adjustment to the lower of cost or market LCM. But inventory items are purchased at different times during the year subject to different price fluctuations. Imagine cases of ballpoint pens or nails coming into the retailer during the year at different times and subject to different price fluctuations.
For these companies with large inventories, tracing the original cost to every inventory item is neither cost-effective nor efficient, and one of the aims of GAAP is to present financial information only when the benefit of reporting that information exceeds the costs of obtaining it.
Though companies may track and measure each item internally for quality assurance and safety measures, it is not necessary to track the actual physical flow of inventory for financial reporting purposes.
Instead, cost flow assumptions are used to simplify inventory reporting and cost of goods sold. These cost flow assumptions, or inventory valuation methods, simplify cost of goods sold and inventory accounting by reducing information required to a few data points in the cost flow process, such as beginning inventory, purchases, and ending inventory.
Items can then be identified based on a cost flow assumption, as opposed to tracking the actual cost of every inventory item that is quickly buried and obscured in the physical flow of inventory.
In periods of rising prices, the last and more expensive items purchased would be recorded into cost of goods sold, resulting in lower taxable income for tax reporting.
Specific Identification Inventory Accounting Illustrated The actual physical flow of inventory items which Sunny purchased over the past three months are as follows: Inventory Purchase one month ago: Inventory Purchase this week:FIFO vs. LIFO accounting July 29, / Steven Bragg. FIFO and LIFO are cost layering methods used to value the cost of goods sold and ending inventory.
FIFO is a contraction of the term "first in, first out," and means that the goods first added to inventory are assumed to be the first goods removed from inventory for sale. LIFO is a. The FIFO method, LIFO method and Weighted Average Cost method are three ways of valuing your inventory.
In this lesson we're going to look at all three methods with examples. Oct 17, · An accountant is an individual who performs accounting tasks for individuals or companies. The exact material that an accountant handles varies depending on the size of the company and the accountant's specialization, but generally includes financial records, taxes, and responsibility for the issuing of financial reports.
Aug 31, · This video explains the LIFO inventory cost assumption (last in, first out). An example is provided to illustrate how LIFO is used to calculate cost of goods sold and ending inventory.
Inventory is defined as assets that are intended for sale, are in process of being produced for sale or are to be used in producing goods.
The . Last-In, First-Out is one of the common techniques used in the valuation of inventory on hand at the end of a period and the cost of goods sold during the period. Accounting Explained Home > Financial Accounting > Inventories > LIFO Method.