Question

We learned the differences between accounting for inventory under the FIFO, LIFO, and average costing methods. Additionally, we explored how the income statement impact may differ under each of the three methods.

Pick a retail company and research which method the company uses to account for inventory. Note: Please select publicly traded companies, as this will make the information easier to locate.

Answer 1

The essential difference between weighted typical price accounting, LIFO, and FIFO approaches of accounting is the difference in which each system calculates inventory and rate of goods sold.

The weighted ordinary cost process makes use of the ordinary of the costs of the items to assign fees. In other words, weighted typical makes use of the components: whole rate of items in inventory to be had on the market divided by way of total quantity of units available for sale.

In contrast, FIFO (first in, first out) accounting implies that the bills assigned to goods are the bills for the primary goods purchased. In different words, the corporation assumes that the first items bought are the oldest or the primary goods purchased. However, LIFO (final in first out) assumes that the last or modern-day objects purchased are the first objects to be sold.

The charges of goods under weighted traditional might be between the fee levels decided via FIFO and LIFO. FIFO is most advantageous in occasions of rising prices, in order that the expenses recorded are low and income is greater, at the same time LIFO is ideal in occasions when tax rates are high due to the fact the costs assigned might be larger and earnings might be decrease.

Keep in mind this example for an illustration. Let's say you're a furniture store and you purchase 200 chairs for $10 after which 300 chairs for $20, and at the finish of an accounting interval you could have offered 100 chairs. The weighted ordinary costs, FIFO, and LIFO bills are as follows:

example:
200 chairs @ $10 = $2,000
300 chairs @ $20 = $6,000
whole quantity of chairs = 500

Weighted typical cost:
rate of a chair: $eight,000 divided by means of 500 = $sixteen/chair
price of items bought: $16 x 100 = $1,600
ultimate inventory: $16 x 400 = $6,four hundred

FIFO:
rate of goods offered: a hundred chairs sold x $10 = $1,000
ultimate inventory: (100 chairs x $10) + (300 chairs x $20) = $7,000

LIFO:
cost of items bought: one hundred chairs offered x $20 = $2,000
last inventory: (200 chairs x $10) + (200 chairs x $20) = $6,000

Importance of Inventory and Cost Methods
When analyzing a business, it's important to understand just how important a role inventory plays in the whole financial picture. Of all the assets on a firm's balance sheet, from cash to office supplies to real estate, if the company sells any type of tangible products, it's likely that inventory is the largest asset category, in terms of dollars, on its balance sheet.

Inventory is where many companies have the majority of their funds invested. Inventory typically consists of finished products for sale, raw materials in the process of being made into goods for sale, and raw materials that are used up during the process of producing items for sale.

To calculate the profit a company produces, it must track sales revenue, and must also accurately track all of the costs involved in producing its widgets. The firm's profits, accordingly, consist of the money remaining from sales after it's covered all of its costs, including the cost of buying its inventory.

When considering LIFO, FIFO, average cost, or some other inventory pricing method such as the lower of cost or market, the cost a company chooses to record for its inventory as it sells affects how much profit it can report for the month, quarter or year. Because of this, companies must choose one method and stick with it for at least a year, then get permission from the IRS if they decide to switch to a different method the following year.

These two methods both have a different effect on a company's financial statements. To understand this, consider how inventory is determined.

Determining Ending Inventory
The Ending Inventory calculation is important because it determines the inventory value that's shown on a company's monthly, quarterly and annual financial statements. This number changes with each unit the company sells and affects the reported profit, asset balance and tax liability of the company.