There are three methods for inventory valuation: FIFO (First In, First Out), LIFO (Last In, First Out), and WAC (Weighted Average Cost). In FIFO, you assume that the first items purchased are the first to leave the warehouse. In other words, whenever you make a sale, under FIFO, the items will be subtracted from the first list of products which entered your store or warehouse. In LIFO, you make the opposite assumption: that the last items that enter your store are the first ones to leave. The WAC method uses the item’s average cost throughout the year. The average cost per unit is calculated by dividing the total cost by the total number of units purchased during the year.

1. Various method of Inventory Accounting
Name – Soumajit Roy
Roll – 11000120033
Stream – CSE
Year – 3rd
Sem – 5th
Subject – Industrial Management

2. Various method of Inventory Accounting
• What Is Inventory Costing?
− Inventory costing, also called inventory cost accounting, is when companies assign costs to products. These costs also
include incidental fees such as storage, administration and market fluctuation. Generally accepted accounting principles
(GAAP) use standardized accounting rules to ensure companies do not overstate these costs.
− Inventory costing is a part of inventory control technique. Proper inventory control within a supply chain helps reduce
the total inventory costs and assists in determining how much product a company should carry. All this information
helps companies decide the needed margins to assign to each product or product type.
− Industry expert Steven J. Weil, Ph.D. and President at RMS Accounting discusses inventory costing and tracking
inventory in the real world. He says,
“The best way to track shrinkage is still regular physical inventories, to check that what the system is saying is
correct.”
“We typically want to cost the stock by departments. Setting similar margins in each department is easier to
track. These similar margins show us when there is shrinkage and how much that product is bringing in (and
what it could be bringing in).”

3. Various method of Inventory Accounting
• Cost of Goods Sold Vs. Inventory
− In accounting, the difference in cost of goods sold (COGS) and inventory values are represented by where the
accountant records them. Companies value inventory at its cost to them and as a part of their current assets. COGS
represents the inventory costs of goods sold to customers.
− Accountants record the ending inventory balance as a current asset on the balance sheet. When inventory increases, the
assets on the balance sheet increase. When inventory decreases, the assets on the balance sheet also decrease.
Accountants also record the change in inventory as a part of the COGS on the income statement.
− Instead of showing a change in inventory as a COGS adjustment, accountants adjust some income statements to show
the calculation of COGS as:
− Companies generally report inventory value at their paid cost. However, a manufacturer would report inventory at the
cost to produce the item, including the costs of raw materials, labor and overhead. Usually, inventory is a significant, if
not the largest, asset reported on a company’s balance sheet.

4. Various method of Inventory Accounting
• Inventory Costing Methods
− The method companies use to cost their inventory directly guides the income and inventory value they report on their
financial statements. Each company chooses a systematic approach to calculating and reporting its inventory turnover,
and regulators expect them to stick to that method every year.
− There are four main methods to compute COGS and ending inventory for a period.
• First In, First Out (FIFO):
Companies sell the inventory first that they bought first.
• Last In, First Out (LIFO):
Companies sell the inventory first that they bought last.
• Weighted Average Cost (WAC):
Companies average the costs of inventory and how much they sell over the period.
• Specific Identification:
Not technically a cost-flow method but allowable under GAAP, this option often uses serial numbers to
differentiate products and their inventory cost specifically.
− GAAP covers FIFO, WAC and Specific Identification. GAAP does not cover LIFO, but it is mentioned above for
comparison purposes.

5. Various method of Inventory Accounting
• To compare methods, consider the example of Jack’s Furniture and its bookcase sales. Regardless of which cost flow
assumption the company uses, the balance sheet for the period starts the same. This journal shows the same beginning
inventory, purchase and associated costs:

6. Various method of Inventory Accounting
• However, when a customer buys 60 units, the difference in these cost flow assumptions is clear. In FIFO, the ending
inventory cost ends up higher to reflect the increase in prices. As a comparison, in LIFO, the ending inventory cost is lower
as a reflection of the increasing prices of the bookcase. In the WAC example, the ending inventory cost is in the middle of
LIFO and FIFO, showing that the price changed.

7. Various method of Inventory Accounting
• If these transactions were the only ones in this period and the sales were $12,000, the income statement and the balance sheet
would look like the following:

8. Various method of Inventory Accounting
• As noted, specific identification is not technically a cost flow assumption, but it is a technique for costing inventory. In this
case, the physical flow of inventory matches the method and is not reliant on timing for cost determination. The use of serial
numbers or identification tags accommodate the use of this method and the identification of each item in inventory, capturing
when the company bought the item and how much it paid. Consider an art dealer that specializes in only one product type,
handmade globes. An example of his inventory flow follows:

9. Various method of Inventory Accounting
• From this information and the information about which specific products the dealer sold over the period, he can calculate the
following figures:
• Ending inventory and COGS are based on what the dealer sold or did not sell from each specifically identified purchase or
beginning inventory. Notice how he separated each purchase based on what he originally paid for them. He knows that
customers purchase his handmade items based on which specific ones they prefer, not on the lot he bought them in. The
gross profit is period retail sales minus the total spent originally for the specific goods he sold during the period.

10. Various method of Inventory Accounting
• Less mainstream methods not covered under GAAP include:
− Highest In, First Out (HIFO): Companies sell the highest-cost inventory first.
− Lowest In, First Out (LOFO): Companies sell the lowest-cost inventory first.
− First Expired, First Out (FEFO): Companies sell the first-expiring inventory first.
• Using the example from above of the bookcases at Jack’s Furniture, the journal starts the same.

11. Various method of Inventory Accounting
• The COGS and inventory balance once again change when customers buy 60 units under the HIFO and LOFO methods
during a period. The HIFO example removes the highest cost inventory first, leaving less value in stock, and the LOFO
example removes the lowest cost inventory first, leaving a higher value in stock.

12. Various method of Inventory Accounting
• For the income statement and the balance sheet for $12,000 worth of sales, HIFO and LOFO would compare as the
following:

13. Various method of Inventory Accounting
• In FEFO, expiration dates drive the sales. For example, if a retailer began with and purchased a total of 80 units and sold 40
units with two different expiration dates, it would look like the following:
• The items in stock after the sale have a later expiration date. The company exhausts the stock with the earliest expiration date
first.

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