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

2. 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

3. 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

4. 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)