Question

What is the difference between FIFO, LIFO and Average Cost Method? What is the impact of FIFO, LIFO and Average cost method amongst income statements and balance sheets? What are the depreciation methods for PPE? What is the impact of each depreciation method on the income statement and balance sheet? What is the asset sale in regards to financial statement impact?

Answer 1

1.The FIFO method, LIFO method and Weighted Average Cost method are three ways of valuing your inventory?.

a. The First-In-First-Out Method (FIFO)

The FIFO method assumes that inventory purchased first is sold first. So, inventory cost under FIFO method will be the cost of latest purchases.

b. The Last-In-First-Out Method (LIFO)

The LIFO method assumes that inventory purchased last is sold first. So, inventory cost under LIFO method will be the cost of earliest purchases.

c. The Weighted Average Cost Method

The Weighted Average Cost method values inventory at the weighted average cost of all the purchases.
Average price is calculated anytime inventory is issued.

2. What is the impact of FIFO, LIFO and Average cost method amongst income statements and balance sheets?

FIFO gives a more accurate value for ending inventory on the balance sheet at the time of inflation.  

LIFO is applicable when tax rate is more.

The Average cost method deals with company's costs of goods sold. It has an impact on its profitability ratios.

3. What are the depreciation methods for PPE?

Depreciation Methods for Property, Plant, and Equipment (PPE)

The straight-line method includes the long-lived asset's usefulness with its age.

Accelerated methods of depreciation includes Sum-of-the-Years Digits expensing.

SYD method treats an asset as more useful in its early life by raising the depreciation expense for the previous years.

4. What is the impact of each depreciation method on the income statement and balance sheet?

Depreciation will be included in the total expenses so it will decreases the earnings on the balance sheet. Depreciation is a contra asset account and it reduces the amount of depreciable assets.The effect of depreciation is shown on the income statement . It should be recorded as an expense.

5.What is the asset sale in regards to financial statement impact?

An asset sale is a cash sale of assets from a government or bank to a third party. The purpose of associate degree quality sale is mostly to extend income, cut back debt risk, and liquidation of assets.