Small business accountants can use one of four distinct inventory costing methods to account for the cost of goods sold. Different inventory costing methods are best suited to different situations and financial goals, and no single method is inherently better than any other. Small business owners should understand the different types of inventory costing methods and the advantages of each to select the best method for their accounting system.
First In, First Out
The first in, first out method most closely approximates the real-world purchasing cycle and parallels the actual flow of inventory from purchase to sale in a wide range of businesses. Under the FIFO method, the oldest costs are assigned to inventory items sold, regardless of whether the sold items were actually purchased at that cost. When the number of inventory items purchased at the oldest cost is sold, the next oldest cost is assigned to sales.
For example, if a company buys 10 widgets at $20 each, then buys 10 more at $19 each, the company would assign the $20 cost to the first 10 widgets it sells, then begin to assign the $19 cost.
Last In, First Out
The last in, first out method is the exact opposite of the FIFO method, assigning the most recent inventory costs to items sold. Last in, first out is less practical in most businesses, but there are a few specific situations in which LIFO more closely approximates the actual flow of inventory. Consider gravel yards, for example, which dump new loads of gravel on top of a pile consisting of several older loads. When a gravel yard sells a load, it takes the materials from the top of the pile – the most recently purchased inventory.
Using the example above under the LIFO method, a company would assign the newest cost of $19 to the first 10 units sold, then move on to the $20 cost, assuming it had not made another purchase in the meantime.
Average Cost Method
The average cost method assigns inventory costs by calculating a moving average of all inventory purchase costs. This method can be ideal for companies that sell non-perishable inventory in a non-sequential manner, such as video game retailers. The average cost method can also provide a more steady, reliable cost recognition structure than other methods, assuming costs do not swing wildly up and down for inventory items.
To continue the example above under the average cost method, a company would assign an average cost of $19.50 – the sum of 20 and 19 divided by 2 – to all 20 widgets sold.
Specific Identification Method
The specific identification method perfectly matches inventory costs with units sold, assigning the exact cost of each sold inventory item when the specific item is sold. This method is not suited for businesses that sell high volumes of relatively homogenous products, such as food producers, but it can be ideal for companies that sell high-dollar items with relatively low volume, such as automobiles or yachts.
Consider a car lot, for example. When a salesperson sells a car, he can forward the exact VIN or invoice number of the car to the accounting department along with the sales information, allowing accountants to look up exactly how much the dealership paid for the car.
A) Nội dung chính
Ending Inventory
Cost of Goods Sold
FIFO
FIFO
- Which inventory method is closest to current cost?
- Which inventory costing method provides the most current?
- Which inventory method best matches current costs with current revenues?
- How do you find the LIFO of cost of goods sold?
B)
Ending Inventory
Cost of Goods Sold
LIFO
LIFO
C)
Ending Inventory
Cost of Goods Sold
FIFO
LIFO
D)
Ending Inventory
Cost of Goods Sold
LIFO
FIFO
Answer: C
60.Which inventory costing method most closely approximates current cost for eachof the following:Ending InventoryCost of Goods Solda.FIFOFIFOb.FIFOLIFOc.LIFOFIFOd.LIFOLIFO 45.Which inventory costing method most closely approximates current cost for each of thefollowing:Ending InventoryCost of Goods Solda.FIFOFIFOb.FIFOLIFOc.LIFOFIFOd.LIFOLIFO
<p> </p> <p><em><strong> </strong></em></p> <p><em><strong>Cost of Goods Sold Ending inventory</strong></em></p> <p><em><strong> a) LIFO FIFO</strong></em></p> <p><em><strong> b) LIFO LIFO</strong></em></p> <p><em><strong> c) FIFO FIFO</strong></em></p> <p><em><strong> d) FIFO LIFO</strong></em></p>
Accounting Financial Accounting
A) Ending Inventory Cost of Goods Sold FIFO
FIFO
B) Ending Inventory Cost of Goods Sold LIFO
LIFO
C) Ending Inventory Cost of Goods Sold FIFO
LIFO
D) Ending Inventory Cost of Goods Sold LIFO
FIFO
Answer: C
45.Which inventory costing method most closely approximates current cost for each of thefollowing:Ending InventoryCost of Goods Solda.FIFOFIFOb.FIFOLIFOc.LIFOFIFOd.LIFOLIFO<p> </p> <p><em><strong> </strong></em></p> <p><em><strong>Cost of Goods Sold Ending inventory</strong></em></p> <p><em><strong> a) LIFO FIFO</strong></em></p> <p><em><strong> b) LIFO LIFO</strong></em></p> <p><em><strong> c) FIFO FIFO</strong></em></p> <p><em><strong> d) FIFO LIFO</strong></em></p>
Accounting Financial Accounting
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Test Bank for Intermediate Accounting, Twelfth Edition8 - 1250.Assuming no beginning inventory, what can be said about the trend of inventory prices ifcost of goods sold computed when inventory is valued using the FIFO method exceedscost of goods sold when inventory is valued using the LIFO method?
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51.In a period of rising prices, the inventory method which tends to give the highest reportednet income is
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52.In a period of rising prices, the inventory method which tends to give the highest reportedinventory is
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53.Quayle Corporation's inventory cost on its balance sheet was lower using first-in, first-outthan it would have been using last-in, first-out.Assuming no beginning inventory, in whatdirection did the cost of purchases move during the period?a. Upb. Downc. Steadyd. Cannot be determined
54.In a period of rising prices, the inventory method which tends to give the highest reportedcost of goods sold is
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55.Which of the following statements isnotvalid as it applies to inventory costing methods?
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Which inventory method is closest to current cost?
(a) First-in, First-out (FIFO): Under FIFO, the cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material bought later in the year. This results in inventory being valued close to current replacement cost.
Which inventory costing method provides the most current?
LIFO gives the most realistic net income value because it matches the most current costs to the most current revenues. Since costs normally rise over time, LIFOs can result in the lowest net income and taxes.
Which inventory method best matches current costs with current revenues?
The inventory costing method that best matches current costs with current revenues is the: LIFO method.
How do you find the LIFO of cost of goods sold?
To calculate FIFO (First-In, First Out) determine the cost of your oldest inventory and multiply that cost by the amount of inventory sold, whereas to calculate LIFO (Last-in, First-Out) determine the cost of your most recent inventory and multiply it by the amount of inventory sold.