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Boundless Accounting
Controlling and Reporting of Inventories
Accounting Textbooks Boundless Accounting Controlling and Reporting of Inventories
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Accounting

Section 3

Valuing Inventory

Book Version 3
By Boundless
Boundless Accounting
Accounting
by Boundless
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9 concepts
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Costing Methods Overview

There are four accepted methods of costing items: specific identification; first-in, first-out; last-in, first-out; and weighted-average.

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Specific Identification Method

Specific identification is a method of finding out ending inventory cost that requires a detailed physical count.

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Cost Flow Assumptions

Inventory cost flow assumptions (e.g., FIFO) are necessary to determine the cost of goods sold and ending inventory.

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Average Cost Method

Under the Average Cost Method, It is assumed that the cost of inventory is based on the average cost of the goods available for sale during the period.

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FIFO Method

FIFO stands for "first-in, first-out," and assumes that the costs of the first goods purchased are charged to cost of goods sold.

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LIFO Method

LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first.

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Gross Profit Method

The gross profit method uses the previous year's average gross profit margin to calculate the value of the inventory.

Selecting an Inventory Method

When selecting an inventory method, managers should look at the advantages and disadvantages of each.

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Impacts of Costing Methods on Financial Statements

The method a company uses to determine it cost of inventory (inventory valuation) directly impacts the financial statements.

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