Accounting & auditingLesson 2 of 2 in the course Depreciation and inventory

FIFO and LIFO as Inventory Cost-Flow Assumptions

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

Inventory costing methods determine which purchase costs are assigned to goods sold and which remain in ending inventory. FIFO and LIFO use different assumptions about the order in which inventory costs are expensed. These choices can affect reported inventory, cost of goods sold, gross profit, and taxes.

FIFO means first-in, first-out. Under this costing method, the cost of the earliest-purchased inventory is assigned to goods sold first. This is an accounting assumption about costs; it does not require a business to track and sell each exact physical item in purchase order.

All flashcards

What is FIFO?
FIFO means first-in, first-out. It assigns the costs of the earliest-purchased inventory to goods sold first.
What is LIFO?
LIFO means last-in, first-out. It assigns the costs of the most recently purchased inventory to goods sold first.
How does FIFO generally affect ending inventory when prices are rising?
It leaves newer, higher purchase costs in ending inventory, which generally makes its value higher than under LIFO.
What is the LIFO reserve?
The difference between inventory values calculated using FIFO and LIFO. If those values are $5,250 and $4,500, the reserve is $750.
Can physical inventory handling differ from the accounting cost-flow assumption?
Yes. A business may physically rotate goods using FIFO while applying a different permitted method to assign inventory costs.

Quiz questions

  1. Does using FIFO for inventory costing require a business to sell the exact physical units in purchase order?Answer: No. FIFO is an assumption about which costs are assigned to goods sold.
  2. A U.S. company uses LIFO for tax purposes. Which method must it also use for financial reporting purposes?Answer: LIFO.
  3. When purchase prices are rising, how does FIFO generally affect COGS compared with LIFO?Answer: It generally produces lower COGS.
  4. A company has 100 units at $50 each, 125 units at $55 each, and 75 units at $59 each. It sells 210 units. What is COGS under FIFO?Answer: $11,050.
  5. What does cost of goods sold (COGS) represent?Answer: The cost assigned to inventory sold during a period.

Based on the Wikipedia article FIFO and LIFO accounting, licensed CC BY-SA 4.0. Adapted into a summary, flashcards and quizzes.

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