Explain the differences between the three main methods of inventory costing. How does the choice of...

Explain the differences between the three main methods of inventory costing. How does the choice of inventory method affect the income statement?

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Explain the differences between the three main methods of inventory costing.

The three main methods of inventory costing are:

FIFO

Weighted Average

LIFO.

FIFO means first in first out. It implies goods purchased first will be sold first. FIFO is accepted by GAAP and it is a widely used method.

Under weighted average goods are recorded at average cost. Sales is also done at the average cost at that time. It is also accepted by GAAP and it is a widely used method.

LIFO means Last in first out. It implies goods purchased last will be sold first. It is not accepted by GAAP and so not widely preferred.

How does the choice of inventory method affect the income statement?

If FIFO used and inventory prices are rising then net income will increase and vice versa.

Average impact of income if weighted average used.

If LIFO used and inventory prices are rising then net income will decrease and vice versa.

ekkarill92 answered 2 years ago

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