dolution

Most companies estimate inventory and cost of goods sold amounts using one of three methods.

(a). First-in, first-out (FIFO) assumes that the units of inventory acquired first are sold first.

(b). Last-in, first-out (LIFO) assumes that the units of inventory acquired most recently are sold first.

(c). Weighted-average uses the average cost of inventory available to determine the cost of units sold.

(d). Perpetual inventory systems, which recognize cost of goods sold as inventory is sold, are used by most companies. Periodic inventory systems, which determine cost of goods sold from a count of inventory on hand at the end of a period, are used when the costs of perpetual systems exceed the benefits of timely inventory information.

(e). LIFO is used by many companies that experience increases in inventory costs over time because it results in lower income taxes and, therefore, higher net operating cash flow.

(f). Companies that use LIFO for determining their income taxes also must use LIFO in preparing their financial statements.

(g). If the market value of inventory at the end of a fiscal period is lower than the cost of the inventory, the inventory should be written down to market value, regardless of which inventory estimation method is used.