Inventory Methods
Learn inventory costing methods including FIFO, LIFO, weighted average, and specific identification. Understand their impact on cost of goods sold and ending inventory.
Learn inventory costing methods including FIFO, LIFO, weighted average, and specific identification. Understand their impact on cost of goods sold and ending inventory.
Key Concepts
Study Tips
- ✓In rising prices: FIFO = higher income, LIFO = lower taxes
- ✓LIFO is not allowed under IFRS, only GAAP
- ✓Practice calculations using inventory cards
- ✓Understand the difference between perpetual and periodic systems
Common Mistakes to Avoid
The most common error is mixing up which costs go to COGS vs. ending inventory. Remember: in FIFO, oldest costs go to COGS; in LIFO, newest costs go to COGS. Also, LIFO is only allowed under US GAAP, not IFRS.
Related Resources
Inventory Methods FAQs
Common questions about inventory methods
FIFO (First-In, First-Out) assumes oldest inventory is sold first, so oldest costs go to cost of goods sold. LIFO (Last-In, First-Out) assumes newest inventory is sold first, so newest costs go to COGS.
During periods of rising prices, FIFO typically results in higher net income because older, lower costs are matched against current revenues. LIFO results in lower income but also lower taxes.
A perpetual inventory system continuously updates inventory records with each purchase and sale. It provides real-time inventory information, unlike the periodic system which only calculates inventory at period end.
IFRS prohibits LIFO because it can result in ending inventory values that are severely outdated (old costs sitting on the balance sheet for years). IFRS prioritizes balance sheet accuracy, and LIFO's ending inventory doesn't reflect current economic values. Also, LIFO is often used primarily for tax benefits rather than to reflect the actual flow of goods.