Lesson 1 of 6 · 13 min
Inventory cost formulas and inventory systems
Every cost formula splits the same cost of goods available for sale between cost of sales and ending inventory; the formulas only disagree about which units are assumed to be sold.
In short
- Cost of goods available for sale = beginning inventory + purchases. It ends up either in cost of sales (income statement) or in ending inventory (balance sheet).
- FIFO sells the oldest units first; LIFO sells the newest first; weighted average cost gives every unit the same average cost; specific identification tracks the actual units.
- IFRS allows FIFO, weighted average and specific identification. LIFO is permitted only under US GAAP.
- A periodic system works out cost of sales at period-end; a perpetual system updates inventory with every sale. The two can give different LIFO (and weighted average) results, but FIFO and specific identification give the same answer either way.
- Inventory cost includes purchase costs (including non-recoverable taxes and duties), conversion costs and costs needed to bring goods to their present location and condition; storing finished goods that await shipment is not included.
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