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Questions and Answers
What is the primary purpose of using the FIFO method?
In an inflationary market, how does the use of FIFO method affect net income compared to LIFO method?
What does LIFO stand for?
What is assumed about the cost of inventory under the FIFO method?
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What is the primary assumption of the LIFO method?
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Study Notes
Inventory Valuation Methods
- The primary purpose of using the FIFO (First-In, First-Out) method is to match the earliest purchased or produced goods with the earliest sales, which is useful for tracking inventory movement.
Effects of FIFO in an Inflationary Market
- In an inflationary market, the use of the FIFO method increases net income compared to the LIFO method, since the earliest (and cheaper) inventory is sold first, leaving the more expensive inventory for later.
LIFO Method
- LIFO stands for Last-In, First-Out.
- The primary assumption of the LIFO method is that the most recent purchases or productions are sold first, which is the opposite of the FIFO method.
Assumptions of FIFO and LIFO
- Under the FIFO method, it is assumed that the cost of inventory is the same for all units, with the earliest purchased or produced goods being sold first.
- Note that the FIFO method does not take into account the actual cost of the inventory, which may be higher or lower than the earliest purchase or production cost.
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Description
Test your knowledge of the FIFO method for cost flow assumption used in manufacturing. Understand how inventory costs are recognized and the effects on the dollar value of total inventory.
