How the Inventory Accounting Method Affects the Income Statement

Companies can generally account for their inventories a number of different ways. The most common are First-in, First-out (FIFO), Last-in, First-out (LIFO), and weighted-average cost. LIFO is permitted under U.S. GAAP but is not permitted under IAS. The choice of inventory method affects both cost of sales and inventory carried on the balance sheet. In periods of rising prices of inventory items (determined on a company-by-company basis), last-in, first-out (LIFO) will result in a conservative reporting of earnings. First-in, first-out (FIFO,) on the other hand, would report higher earnings relative to LIFO. In periods of declining prices for inventory items, the opposite is true.

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See also:
  • The Cash Method of Accounting
  • Inventory Accounting: Differences Between U.S. GAAP and International Standards
  • Cumulative Effect of Accounting Changes
  • Cash Flow Statement – The Indirect Method
  • Inventory Accounting Methods: LIFO, FIFO, Weighted Average and Specific Identification
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