Finance Management
Finance Basics: Accounting For Inventory (B)
What are methods of inventory value accounting?
Posted: Apr 2009
<<< Previously on Finance Basics: Production Ventures
ACCOUNTING FOR INVENTORY
A company's inventory can be valued using different methods.
The most common methods of valuing inventories are:
First In First Out ( FIFO ) - the company sells the oldest goods first.
Last In First Out ( LIFO ) - the company sells the newest goods first.
Average - the company averages the cost of all goods in stock.
The method used affects the profit & loss statement, in cost of goods sold, and the balance sheet, in inventory.
DAY NINE
JS decides to account for the company's inventory using the FIFO method.
Looking at the accounts from Day Eight, JS realizes that the business really needs to sell more sandwiches, if the investment in the equipment is to pay off.
So, a big sales push is undertaken, JS paints a bigger sign and tells all his friends to spread the word.
KEY TIPS
Inventory can be accounted for in several different ways.
The company must choose an appropriate accounting method and apply it consistently.
• The method used to account for inventory will affect the cost of goods sold on the profit & loss statement and the inventory item on the balance sheet.
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