Intermediate Accounting 7 Inventories Average Cost Method Assigns the same average cost to each unit sold and each item in inventory. weighted average for the entire period e For periodic Inventory the unit cost is th For perpetual Inventory the unit cost is computed as a moving average, which changes with each new purchase of goods
Average Cost Method Intermediate Accounting 7 Inventories ➢ Assigns the same average cost to each unit sold and each item in inventory. ➢ For Periodic Inventory, the unit cost is the weighted average for the entire period. ➢ For Perpetual Inventory, the unit cost is computed as a moving average, which changes with each new purchase of goods
Intermediate Accounting 7 Inventories Last-in, First-out (LIFO) Method Assigns the most recent historical costs to Cost of Goods sold and the oldest costs to Inventory Is used primarily to minimize taxable income Results in differences between Cost of Goods Sold and inventory for perpetual inventory versus periodic inventor
Last-in, First-out (LIFO) Method Intermediate Accounting 7 Inventories ➢ Assigns the most recent historical costs to Cost of Goods Sold and the oldest costs to Inventory. ➢ Is used primarily to minimize taxable income. ➢ Results in differences between Cost of Goods Sold and Inventory for perpetual inventory versus periodic inventory
LIFO and FiFo in Times of Inflation LIFO assumes the new units/ LiFO are sold FIFO assumes FIFO/ the old units are SO Beginning of End of year Year
Unit Cost of Goods Sold Beginning of Year End of Year FIFO assumes the old units are sold FIFO LIFO assumes the new units are sold LIFO Intermediate Accounting 7 Inventories LIFO and FIFO in Times of Inflation
Intermediate Accounting 7 Inventories FIFO Advantages and disadvantages Advantages v Corresponds with physical flow of goods Disadvantages v Matches older costs with Ending inventory current revenues balance is close to Inventory holding gains current replacement cost. and losses are part of gross ofit √ No income tax deferral
FIFO Advantages and Disadvantages Intermediate Accounting 7 Inventories Advantages ✓Corresponds with physical flow of goods. ✓Ending inventory balance is close to current replacement cost. Disadvantages ✓Matches older costs with current revenues. ✓Inventory holding gains and losses are part of gross profit. ✓No income tax deferral