Question 1

What is the difference between FIFO and LIFO?

Accepted Answer

FIFO (First In, First Out) assumes the oldest inventory is sold first, so ending inventory reflects the most recent purchase costs. LIFO (Last In, First Out) assumes the newest inventory is sold first, so ending inventory reflects older costs. In times of rising prices, FIFO results in higher inventory values and lower COGS, while LIFO results in lower inventory values and higher COGS.

Question 2

How does Weighted Average costing work?

Accepted Answer

Weighted Average costing divides the total cost of all units available for sale by the total number of units. This blended per-unit cost is then applied to both COGS and ending inventory, smoothing out price fluctuations across purchase batches.

Question 3

Which inventory valuation method should I use?

Accepted Answer

The best method depends on your business and goals. FIFO is the most common and aligns with natural inventory flow. LIFO can reduce taxable income when prices rise but is not allowed under IFRS. Weighted Average is simplest to maintain and works well when units are interchangeable.

Question 4

Can I switch between valuation methods?

Accepted Answer

Switching methods is possible but regulated. In the US, changing from LIFO requires IRS approval (Form 3115). Businesses should consult an accountant before switching, as it can impact taxes and financial statements significantly.

Question 5

How do I calculate cost of goods sold with FIFO?

Accepted Answer

With FIFO, cost of goods sold is calculated by assigning the cost of the earliest purchased units to the units sold. Start with the oldest batch, use up its quantity, then move to the next batch until the total units sold are accounted for.

Date	Quantity	Unit Cost ($)	Line Total
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