Cost Flow Assumptions

Cost Flow Assumptions
First-in, First-out (FIFO) method
Last-in, First-out (LIFO) method
Weighted average method

First-in, First-out (FIFO) method
Old purchases are assumed to be sold first.
Recent purchases are included in the ending inventory.

Last-in, First-out (LIFO) method
Recent purchases are assumed to be sold first.
Old purchases are included in the ending inventory.

International Financial Reporting Standards, IFRS
Under IFRS, Last-in, First-out (LIFO) method is not permitted.

Weighted average method
Average cost is applied to the cost of goods sold and ending inventory calculations.

Exercise 1: Periodic Inventory System
Entity A had the following transactions during January 20×1:
(1) January 1, beginning inventory had 1,000 units at $50 per unit cost.
(2) January 11, purchased 1,200 units of merchandise at $52 per unit cost.
(3) January 16, sold 1,700 units of merchandise.
(4) January 27, purchased 1,400 units of merchandise at $56 per unit cost.
Entity A uses a periodic inventory system and updates merchandise inventory balance at the end of January 20×1.


Exercise 2: Perpetual Inventory System
Entity B had the following transactions during January 20×1:
(1) January 1, beginning inventory had 1,000 units at $50 per unit cost.
(2) January 11, purchased 1,200 units of merchandise at $52 per unit cost.
(3) January 16, sold 1,700 units of merchandise.
(4) January 27, purchased 1,400 units of merchandise at $56 per unit cost.
Entity B uses a perpetual inventory system and updates merchandise inventory balance at the end of January 20×1.




 

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