Question

Define the four inventory cost methods and identifying which inventory method is best for gross profit if the company expects inventory prices to decline.

Answer 1

Four inventory methods are.

● First in first out (FIFO)

●Last in first out.(LIFO)

●Weighted average methods.

●Specific identification.

FIFO

In this method it is assumed that inventories purchased first were used in the cost of goods sold when sales were happened.

LIFO

In this method it is assumed that inventories purchased at last were used in the cost of goods sold when sales were happened.

Weighted average method

In this method company's uses weighted average cost method to value Closing inventory. Company's having same cost units were using weighted average method.

Specific identification

In this method the cost of specific products were attached to the specific products. Large products companies were using this method. Eg Bus production companies.

●FIFO method shows high gross profit in companies. Because FIFO have higher ending inventory and less cost of sales.