Question

What are the four inventory methods (explained) and how does each method determine the cost of goods sold?

Answer 1

Inventory Method-

1] First in first out Method (FIFO)-

This is the inventory method which values inventory as per a specific rule, i.e Inventory which comes in first should be sold first and accordingly COGS should be determined.The invenory which is purchased in last must remain in closing inventory and inventory which were purchased earlier must be booked as Cost of goods sold.

2] Last in first out Method (LIFO)-

This Inventory method is based on the assumption that the inventory which has been purchased at last is stored at the doors of warehouse,hence at the time of sale this inventory should be sold first.This method is just opposite to the FIFO method.COGS can be calculated in this method using above assumption.

3] Weighted Average Method -

This is inventory method where the cost of inventory available for sale iss divided by Number of units available for sale.This process provides a weighted average rate,which is used in calculating the COGS and closing Inventory.This rate is multiplied by the number of units sold in order to arrive at Cost of goods sold and multiplied to Units of Inventory in hand to arrive at closing Inventory.

4] Specific Identification Method-

Under this method the Inventory is identified based on the rates and its quality and valued at a original price of Purchase.This type of method is used when there are few number of items are available in the inventory and Cost of these inventory is ascertained easily from the face of the items.

Under this method closing Inventory is calculated based on inventories available at the end of reporting period.The closing inventory cost is reduced from the Total inventory availabe for sale,in order to arrive at COGS.

Thats It,

Please comment for any explanation,

Thanks,