Inventory Pricing Methods –LIFO, FIFO, weighted average, specific identification

LIFO and FIFO – keeping the unit prices separately First in First out Last in First out Assumes older prices used first to determine cost of goods sold (CGS), ending inventory newer prices Logical and popular Accepted by international With inflation, yields lowest CGS, highest profits and ending inventory. Not the best method for tax purposes Assumes recent prices used first to determine CGS, ending inventory then is older prices Not accepted by international Good method for tax breaks with inflation Tax use requires book use With inflation, yields highest CGS, lowest profits & ending inventory Ending inventory often understated with inflation

Other methods Label each unit with the wholesale price actually paid Specific identification Weighted average Label each unit with the wholesale price actually paid Acceptable internationally Could allow manipulation of CGS/ending inventory Not practical for low- priced, high-turnover goods Used less than FIFO, LIFO Acceptable internationally CGS/ending inventory would use average cost (not new or old costs) Each purchase requires reaveraging Rounding errors

Application of inventory methods Once a method is selected, it must be used year after year by the company (consistency) Can use a different method for different categories of inventory (i.e., different product lines) Used for merchandise inventory, finished goods inventory, investments in stock, tax rules, etc. Special footnote required by companies that use LIFO called LIFO reserve (allows easier comparison to FIFO companies) The actual physical flow of goods need not coincide with these costing methods (so a grocery store selling on a FIFO basis could elect to use LIFO for books and for taxes)