Accounting Inventory Methods

Inventories are items that the company keeps for sale, or items that are used for the manufacture of its products are sold. The method uses an undertaking to account for their stock, the amount of expenses for the cost of goods on the financial statements and the recognized value of stocks sold in the budget. There are several ways to measure the inventory accounts. First there is the method of first in first out, or more precisely known as FIFO. In addition, there are last-in, load-out or LIFO. The last two techniques are the weighted average and specific identification. All four of these methods are effective and can be used in financial accounting to measure inventory. It is also important to know that there are two different inventory systems. The first is a regular, the inventory account is updated or changed only once a year. During the year, the inventory account will probably show that the cost of inventories at the end of last year. The second type of inventory system is unlimited. As regards the inventory of perpetual inventory system is updated. The inventory account is increased with the cost of goods purchased from suppliers and reduced the cost of goods sold to customers.

FIFO assumes that the first article is placed in the magazine sold first. This means that the inventory at the end of last year is placed in the inventory. FIFO is a method of cost of goods sold (COGS) for a specific undertaking. For example, we say that a bakery produces 200 loaves of bread on Monday for $ 1 each, and another 200 on Tuesday at $ 1.25 each. FIFO states that if the bakery sold 200 loaves on Wednesday, CMV of $ 1 bread, is recorded on the income statement, because the cost for each of the first inventory breads. Breads $ 1.25 would be charged to the closing balance, which appears in the balance sheet.

LIFO assumes that the last element inserted into the magazine, the first sold during an accounting period. This means that the stocks at the end of the year consists of stock at the beginning of the sabbatical year at the end. LIFO is a method of determining cost of goods sold to a company. The old stock is more than the end of the left. For the 200 loaves sold on Wednesday, the same $ 1.25 for bakers, CMV would allocate the remaining amount would be a bread used to calculate the value of inventories at the end of the period.

The weighted average is a calculation method in which the weighted average unit cost for the period, the cost of goods sold by the number of units shipped for sale. Takes the weighted average of all units available for sale during the period, and then uses it to determine the average cost for stocks end value and production costs. In our example, the bakery is the average cost of inventory of $ 1.125 per unit, calculated as [($ 200 x 1) + ($ 200 x 1.25)] / 400

Specific identification is a method of tracking the cost of closing. Specific identification is usually large, easily traceable products, such as used cars or furniture. It requires a very detailed physical count, so the company knows exactly how many of each product were placed on specific dates at the end of the year inventory. If this information is, the quantity of goods which increases their cost of purchase date to get a number for final inventory costs. Specific identification requires long and is usually only for inventories of people identifiable only with a relatively high cost per unit (such as cars, jewelry, etc.).

If prices were constant over time, all three methods produce the same result, because each unit would be purchased for the same amount. But how to change prices in order, each method will yield different results. In times of inflation, LIFO will produce a small amount of gross margin and a lower value to the asset. The FIFO will generate a higher gross profit and a warehouse of more final equilibrium. In times of inflation, LIFO provides a tax savings attributable to the significant reduction in profits and reduce inventory. But in times of deflation, the effects are exactly the opposite.