Question

Do the terms LIFO, FIFO, and Weighted Average have anything to do with the actual physical flow of the items in inventory? Please explain.

Answer 1

No, LIFO, FIFO, and Weighted Average have nothing to do with the actual physical flow of the items in inventory.

FIFO or first in first one states that inventory purchased first is sold first

LIFO of last in first out states that inventory purchased later is sold first

Weighted average method takes into weighted average cost for the purpose of calculation.

All these methods are used for determining cost of goods sold and ending inventory. None of these are related to physical flow of inventory as number of units sold are homogenuous and will be same under all the cases.

The methods will only change the way of calculation of costs.