Question

There are four basic inventory cost flow assumptions. What are they and how are they calculated? What is the impact of each on the balance sheet and on the income statement when:

1. Prices are rising?

2. Prices are falling?

Answer 1

	PARTICULARS	FIFO : FIRST IN FIRST OUT	LIFO : LAST IN FIRST OUT	AVERAGE COST METHOD	SPECIFIC INDENTIFICATION METHOD
	Meaning	Under this Method, inventory that entity bought first will be issued first.	Under this Method, inventory that entity bought last will be issued first.	Under Average Cost Method, inventory is issued at the average cost.	This method is generally used for Customization Industry where Invetory is made order based specifically.
	Calculation	Remaining Inventory in Stores are the latest ones. Calculated on cost of Latest Inventory.	Remaining Inventory in Stores are the latest ones.	Pool of Inventory is made & average cost is derived by dividing Total Cost with Total Quantity.	Cost is calculated based on Cost Sheet of Specific Style considering the Items used in production. Either Period System will be followed or Perpectual System.
	IMPACT
	On Balance Sheet
	Prices are Rising	Shows true picture as fair value is shown as only Latest Inventory is availabe. Higher Inventory	Lower Inventory Value	Same Inventory Level	Same Inventory Level
	Prices are Falling	Shows true picture as fair value is shown as only Latest Inventory is availabe. Lower Inventory	Higher Inventory Value	Same Inventory Level	Same Inventory Level
	On Income Statement
	Prices are Rising	Higher Profits	Lower Profits	Constant Profits	Constant Profits
	Prices are Falling	Lower Profits	Higher Profits	Constant Profits	Constant Profits

For Better Presentation,

	PARTICULARS	FIFO : FIRST IN FIRST OUT	LIFO : LAST IN FIRST OUT	AVERAGE COST METHOD	SPECIFIC INDENTIFICATION METHOD
	Meaning	Under this Method, inventory that entity bought first will be issued first.	Under this Method, inventory that entity bought last will be issued first.	Under Average Cost Method, inventory is issued at the average cost.	This method is generally used for Customization Industry where Invetory is made order based specifically.
	Calculation	Remaining Inventory in Stores are the latest ones. Calculated on cost of Latest Inventory.	Remaining Inventory in Stores are the latest ones.	Pool of Inventory is made & average cost is derived by dividing Total Cost with Total Quantity.	Cost is calculated based on Cost Sheet of Specific Style considering the Items used in production. Either Period System will be followed or Perpectual System.
	IMPACT
	On Balance Sheet
	Prices are Rising	Shows true picture as fair value is shown as only Latest Inventory is availabe. Higher Inventory	Lower Inventory Value	Same Inventory Level	Same Inventory Level
	Prices are Falling	Shows true picture as fair value is shown as only Latest Inventory is availabe. Lower Inventory	Higher Inventory Value	Same Inventory Level	Same Inventory Level
	On Income Statement
	Prices are Rising	Higher Profits	Lower Profits	Constant Profits	Constant Profits
	Prices are Falling	Lower Profits	Higher Profits	Constant Profits	Constant Profits
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