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    Inventory Valuation: First in First Out (FIFO) Last in First Out (LIFO) Average Cost Method (AVCO)

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    Abhilash Jha
    The document discusses different methods for valuing inventory at the end of an accounting period, including first in first out (FIFO), last in first out (LIFO), and average cost method (AVCO). Under FIFO, the cost of the latest purchases is used, assuming inventory purchased first is sold first. LIFO uses the cost of earliest purchases, assuming inventory purchased last is sold first. The AVCO method values inventory at the weighted average cost of all purchases, with the average cost recalculated each time inventory is issued.

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    Inventory Valuation: First in First Out (FIFO) Last in First Out (LIFO) Average Cost Method (AVCO)

    Uploaded by

    Abhilash Jha
    152 views9 pages
    The document discusses different methods for valuing inventory at the end of an accounting period, including first in first out (FIFO), last in first out (LIFO), and average cost method (AVCO). Under FIFO, the cost of the latest purchases is used, assuming inventory purchased first is sold first. LIFO uses the cost of earliest purchases, assuming inventory purchased last is sold first. The AVCO method values inventory at the weighted average cost of all purchases, with the average cost recalculated each time inventory is issued.

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    The document discusses different methods for valuing inventory at the end of an accounting period, including first in first out (FIFO), last in first out (LIFO), and average cost method (AVCO). Under FIFO, the cost of the latest purchases is used, assuming inventory purchased first is sold first. LIFO uses the cost of earliest purchases, assuming inventory purchased last is sold first. The AVCO method values inventory at the weighted average cost of all purchases, with the average cost recalculated each time inventory is issued.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    152 views9 pages

    Inventory Valuation: First in First Out (FIFO) Last in First Out (LIFO) Average Cost Method (AVCO)

    Uploaded by

    Abhilash Jha
    The document discusses different methods for valuing inventory at the end of an accounting period, including first in first out (FIFO), last in first out (LIFO), and average cost method (AVCO). Under FIFO, the cost of the latest purchases is used, assuming inventory purchased first is sold first. LIFO uses the cost of earliest purchases, assuming inventory purchased last is sold first. The AVCO method values inventory at the weighted average cost of all purchases, with the average cost recalculated each time inventory is issued.

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    Download as pptx, pdf, or txt
    of 9

    INVENTORY VALUATION

    As inventory is usually purchased at different rates (or manufactured at


    different costs) over an accounting period, there is a need to determine
    what cost needs to be assigned to inventory. For instance, if a company
    purchased inventory three times in a year at $50, $60 and $70, what
    cost must be attributed to inventory at the year end? Inventory cost at
    the end of an accounting period may be determined in the following
    ways:

    First In First Out (FIFO)


    Last In First Out (LIFO)
    Average Cost Method (AVCO)

    First In First Out (FIFO)

    "FIFO" stands forfirst-in, first-out,

    This method assumes that inventory purchased first is sold first.


    Therefore, inventory cost under FIFO method will be the cost of latest
    purchases.

    Last In First Out (LIFO)

    This method assumes that inventory purchased last is sold first.


    Therefore, inventory cost under LIFO method will be the cost of earliest
    purchases.

    Since the 1970s, some U.S. companies shifted towards the use of LIFO,
    which reduces their income taxes in times ofinflation, but since IFRS
    banned LIFO, more companies returned to FIFO.

    LIFO is used only in theUnited States, which is governed by the


    generally accepted accounting principles(GAAP).

    Average Cost Method (AVCO)

    This method values inventory at the weighted average cost of all


    purchases.

    Average cost is calculated each time inventory is issued.

    Example

    FIFO

    As can be seen from above, the inventory cost under FIFO method relates to
    the cost of the latest purchases.

    LIFO

    Therefore value of inventory using LIFO will be based on outdated prices.

    AVCO

    AVCO method allocates cost on the average cost of purchases during the
    period. Average cost of inventory changes every time a purchase is made at a
    different price.

    WEIGHTED AVERAGE METHOD

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