FIFO, LIFO, Average Cost

FIFO, LIFO, Average Cost

FIFO, LIFO, Average Cost

Financial accounting had a lot of important information that must be learned before taking the next step on to Managerial Accounting. We learned about Debits and Credits and how they are used every time you create a balance sheet. We also learned about income statements and how the revenue is transformed into the net income. It also displays revenues from a specific period of a certain year. The thing that really stuck out to me from financial accounting was the inventory costing method and how it is comprised of FIFO, meaning first in first out, and LIFO which is last in first out. The final part of the inventory costing method is average cost. All three of the inventory costing methods are used in many businesses in order to keep track of inventory. Inventory is one of the most important parts of a business because it is comprised of the business's assets. Without assets a business cannot run and operate normally,so you can see why the inventory costing method is crucial for business's to use.

FIFO method is used when the cost of merchandise is sold in the order in which they were purchased. It is an inventory costing method which assumes that the first items placed in inventory are the first sold. The FIFO method provides results that can be the same results as those that would have came out of the specific identification method. FIFO gives us a better indication of the value of ending inventory, but it also increases net income because the inventory that might be several years old is used to value the cost of goods sold.

When the LIFO method is used, the cost of the units sold is the cost of the most recent purchases. LIFO is not a good indicator of ending inventory value because the leftover inventory might be extremely old. This results in a valuation that is much lower than today's prices. LIFO results in lower net income because cost of goods sold is higher.

The final part of the inventory costing method is average cost. This technique is called the moving average. It is called this because every time a purchase is made you calculate an average unit of cost each time you sell a product. The cost of the goods a company sells is calculated at the end of the year to give you the new cost of the goods sold.

Learning accounting is very important for people to learn because it allows them to keep track of purchases and items sold. The three parts of the inventory costing method are FIFO, LIFO, and average cost.The FIFO method states the first items added in the inventory are the first ones sold and out of the inventory. LIFO states the last product added into the inventory are the first ones off the inventory list. Average cost is an average unit that is associated with the product that was taken off the inventory list. All three are important for businesses to use because they keep track of the assets and other valuable information of a business.

FIFO, LIFO, Average Cost

By: Shawn Leo

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