Table of Contents
- 1 Which inventory method matches sales with the most recent cost of goods sold?
- 2 What is LIFO inventory method?
- 3 Which method of inventory valuation best matches the cost of goods sold with current replacement cost?
- 4 When would you use LIFO inventory method?
- 5 Is the specific identification method dependent on cost flow?
- 6 How are goods available for sale allocated in accounting?
Which inventory method matches sales with the most recent cost of goods sold?
LIFO
A LIFO liquidation is when a company sells its newest inventory first. It is an accounting method that uses the last-in, first-out (LIFO) inventory costing method. LIFO matches the most recent costs against current revenues.
What is LIFO inventory method?
Last in, first out (LIFO) is a method used to account for inventory. Under LIFO, the costs of the most recent products purchased (or produced) are the first to be expensed. Other methods to account for inventory include first in, first out (FIFO) and the average cost method.
Why FIFO and LIFO methods are used?
FIFO (first in, first out) inventory management seeks to sell older products first so that the business is less likely to lose money when the products expire or become obsolete. LIFO (last in, first out) inventory management applies to nonperishable goods and uses current prices to calculate the cost of goods sold.
What is the FIFO method of food storage?
First In, First Out (FIFO) is a system for storing and rotating food. In FIFO, the food that has been in storage longest (“first in”) should be the next food used (“first out”). This method helps restaurants and homes keep their food storage organized and to use food before it goes bad.
Which method of inventory valuation best matches the cost of goods sold with current replacement cost?
(a) First-in, First-out (FIFO): Under FIFO, the cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material bought later in the year. This results in inventory being valued close to current replacement cost.
When would you use LIFO inventory method?
When prices are rising, it can be advantageous for companies to use LIFO because they can take advantage of lower taxes. Many companies that have large inventories use LIFO, such as retailers or automobile dealerships.
What is LIFO and FIFO with example?
The Last-In, First-Out (LIFO) method assumes that the last unit to arrive in inventory or more recent is sold first. The First-In, First-Out (FIFO) method assumes that the oldest unit of inventory is the sold first.
What are the different methods of inventory costing?
Be able to apply inventory costing methods such as FIFO, LIFO, weighted average, and specific identification. Distinguish between the physical flow of goods and their cost flow for accounting purposes.
Is the specific identification method dependent on cost flow?
As its name suggests, the specific identification method does not depend on a cost flow assumption. With first-in, first-out, the oldest cost (i.e., the first in) is matched against revenue and assigned to cost of goods sold. Conversely, the most recent purchases are assigned to units in ending inventory.
How are goods available for sale allocated in accounting?
Notice that the goods available for sale are “allocated” to ending inventory and cost of goods sold. In the graphic, the inventory appears as physical units. But, in a company’s accounting records, this flow must be translated into units of money. The following graphic illustrates this allocation process.
Which is first in, first out in cost of goods sold?
With first-in, first-out, the oldest cost (i.e., the first in) is matched against revenue and assigned to cost of goods sold. Conversely, the most recent purchases are assigned to units in ending inventory.