Explain (220 to 250 words) the five following methods of inventory valuation:- 1/. LIFO (Last in...

Explain (220 to 250 words) the five following methods of inventory valuation:-

1/. LIFO (Last in First out)?

2/. FIFO (First in First out)?

3/. Averaging?

4/. Specific Identification?

5/. LCM (Lower of Cost or Market)?

(Please type up your answer and keep within the word limit)

Expert Solution

1. LIFO - Last in first out , is one of the method of valuation of inventory, according to which goods produced/purchased in last are sold first. Cost of most latest products produced/ purchased, is treated as expense as cost of goods sold. And cost of old goods will be included in inventory.

2. FIFO- first in first out, one of method of inventory valuation, and opposite to LIFO, as per this method goods produced/purchased first are sold first. Cost of old goods are treated as expense as cost of goods sold. And cost of latest goods is included in inventory.

3. Averaging - under the averaging cost method, it is assumed that the cost of inventory is based on the average cost of the goods available for sale. The average cost is computed by dividing the total cost of goods available for sale by the total units available for sale. This gives a weighted-average unit cost that is applied to the units in the closing inventory.

4. Specific identification - in this method inventory is calculated by physically counting each product, and then multiply them by their respective purchase cost.

5. LCM - lower of cost or market value, as per this method company should record inventory at its cost or market value, whichever is lower. When company hold inventory for a long period , it's market value can be declined due to deterioration in goods.

ekkarill92 answered 2 years ago

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