Inventory Valuation Methods
Inventory valuation methods (FIFO, LIFO, weighted average) determine how costs are assigned to inventory sold and inventory remaining, affecting both cost of goods sold and ending inventory on the financial statements.
Explanation
FIFO (first-in, first-out) assumes the oldest costs are sold first, resulting in ending inventory at the most recent costs. LIFO (last-in, first-out) assumes the newest costs are sold first, resulting in lower taxable income during periods of rising prices. Weighted average assigns a uniform cost per unit based on total cost divided by total units.
Inventory is reported at the lower of cost or net realizable value (NRV) under ASC 330. If NRV drops below cost, the inventory is written down and the loss is recognized. LIFO uses the lower of cost or market (with a ceiling/floor framework) rather than NRV. The dollar-value LIFO method uses price indices to measure inventory layers.
Key Points
- •FIFO: oldest costs to COGS, newest costs remain in ending inventory
- •LIFO: newest costs to COGS, results in lower income in rising price environments
- •Lower of cost or NRV applies (lower of cost or market for LIFO)
- •LIFO is permitted under U.S. GAAP but prohibited under IFRS
Exam Tip
Be comfortable converting between FIFO and LIFO using the LIFO reserve. Also know the lower of cost or market ceiling/floor calculation for LIFO inventory.
Frequently Asked Questions
Related Topics
Income Statement
The income statement reports an entity's revenues, expenses, gains, and losses over a period of time, resulting in net income or net loss.
Balance Sheet (Statement of Financial Position)
The balance sheet reports an entity's assets, liabilities, and equity at a specific point in time, following the fundamental accounting equation: Assets = Liabilities + Equity.
Depreciation Methods
Depreciation is the systematic allocation of the cost of a tangible long-lived asset over its useful life, using methods such as straight-line, declining balance, or units of production.
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