inventory valuation methods determine the cost of goods sold and the inventory b
ID: 2590520 • Letter: I
Question
inventory valuation methods determine the cost of goods sold and the inventory balance. describe the difference between the lifo, fifo and average cost methods of accounting for inventory. give an example of the application of each method lifo, fifo and average cost . inventory valuation methods determine the cost of goods sold and the inventory balance. describe the difference between the lifo, fifo and average cost methods of accounting for inventory. give an example of the application of each method lifo, fifo and average cost . inventory valuation methods determine the cost of goods sold and the inventory balance. describe the difference between the lifo, fifo and average cost methods of accounting for inventory. give an example of the application of each method lifo, fifo and average cost .Explanation / Answer
The FIFO method, LIFO method and Weighted Average Cost method are three ways of valuing inventory.
FIFO method assumes that the first inventories bought are the first ones to be sold, and that inventories bought later are sold later.
LIFO method assumes that the last inventories bought are the first ones to be sold, and that inventories bought first are sold last.
Average cost method is most commonly used in manufacturing businesses where inventories are piled or mixed together and cannot be differentiated, such as chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those bought yesterday, as they are all mixed together.
Example:
1) FIFO METHOD
Opening Inventory
Purchase Inventory
Sale Inventory
Ending Inventory
Date
Qty
Price
Total
Qty
Price
Total
Qty
Price
Total
Qty
Price
Total
Aug-01
80
20
1600
80
20
1600
Aug-05
100
21.16
2116
80
20
1600
100
21.16
2116
Aug-08
200
22.08
4416
80
20
1600
100
21.16
2116
200
22.08
4416
Aug-11
80
20
1600
85
21.16
1798.6
15
21.16
317.4
200
22.08
4416
TOTAL
1600
6532
3398.6
4733.4
Ending Inventory
4733.4
Cost of goods sold
3398.6
2) LIFO METHOD
Opening Inventory
Purchase Inventory
Sale Inventory
Ending Inventory
Date
Qty
Price
Total
Qty
Price
Total
Qty
Price
Total
Qty
Price
Total
Aug-01
80
20
1600
80
20
1600
Aug-05
100
21.16
2116
80
20
1600
100
21.16
2116
Aug-08
200
22.08
4416
80
20
1600
100
21.16
2116
200
22.08
4416
Aug-11
165
22.08
3643.2
35
22.08
772.8
100
21.16
2116
80
20
1600
TOTAL
1600
6532
3643.2
4488.8
Ending Inventory
4488.8
Cost of goods sold
3643.2
AVERAGE METHOD
Opening Inventory
Purchase Inventory
Cost of Goods sold
Ending Inventory
Date
Qty
Price
Total
Qty
Price
Total
Qty
Price
Total
Qty
Price
Total
Aug-01
80
20
1600
80
20
1600
Aug-05
100
21.16
2116
180
20.64444
3716
Aug-08
200
22.08
4416
380
21.4
8132
Aug-11
165
22.08
3643.2
215
20.878
4488.80
TOTAL
1600
6532
3643.2
4488.80
Inventory on Hand =
4488.8
Cost of goods sold =
3643.2
1) FIFO METHOD
Opening Inventory
Purchase Inventory
Sale Inventory
Ending Inventory
Date
Qty
Price
Total
Qty
Price
Total
Qty
Price
Total
Qty
Price
Total
Aug-01
80
20
1600
80
20
1600
Aug-05
100
21.16
2116
80
20
1600
100
21.16
2116
Aug-08
200
22.08
4416
80
20
1600
100
21.16
2116
200
22.08
4416
Aug-11
80
20
1600
85
21.16
1798.6
15
21.16
317.4
200
22.08
4416
TOTAL
1600
6532
3398.6
4733.4
Ending Inventory
4733.4
Cost of goods sold
3398.6
2) LIFO METHOD
Opening Inventory
Purchase Inventory
Sale Inventory
Ending Inventory
Date
Qty
Price
Total
Qty
Price
Total
Qty
Price
Total
Qty
Price
Total
Aug-01
80
20
1600
80
20
1600
Aug-05
100
21.16
2116
80
20
1600
100
21.16
2116
Aug-08
200
22.08
4416
80
20
1600
100
21.16
2116
200
22.08
4416
Aug-11
165
22.08
3643.2
35
22.08
772.8
100
21.16
2116
80
20
1600
TOTAL
1600
6532
3643.2
4488.8
Ending Inventory
4488.8
Cost of goods sold
3643.2
AVERAGE METHOD
Opening Inventory
Purchase Inventory
Cost of Goods sold
Ending Inventory
Date
Qty
Price
Total
Qty
Price
Total
Qty
Price
Total
Qty
Price
Total
Aug-01
80
20
1600
80
20
1600
Aug-05
100
21.16
2116
180
20.64444
3716
Aug-08
200
22.08
4416
380
21.4
8132
Aug-11
165
22.08
3643.2
215
20.878
4488.80
TOTAL
1600
6532
3643.2
4488.80
Inventory on Hand =
4488.8
Cost of goods sold =
3643.2
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