Financial Education

U. S. GAAP considers inventory cost at the time it was placed in inventory, whereas International Accounting Standards base the cost on the order in which the products are sold. When possible, international standards prefer that the specific identification method be used.

When it is not practical to track inventory costs on a unit basis, international standards permit either the first-in, first-out (FIFO) method or the weighted average cost method. Lifo is not permitted, as it is under U.S. standards. Fortunately, U.S. standards require companies using LIFO to report the FIFO inventory value, and thus it is generally possible to adjust the U.S. financial statements for comparability with firms that do not use LIFO.

Both standards require inventory to be stated at the lower of cost or market value, and inventory that has declined in value must be written down. Under U.S. standards these writedowns cannot be reversed even if the inventory subsequently rises in value. International standards do permit reversal of inventory writedowns.

For more information, see all articles on: Accounting, Adjusting Reported Financial Statements, Financial Statement Analysis, Fundamental Analysis, Investing in Stocks, Ratio Analysis

See also:

Barriers to Developing Universally Accepted Accounting Standards

Accounting for Inventory After Purchase and Before Resale

The Cash Method of Accounting

Interest and Dividends: Differences Between US GAAP and International Accounting Standards

Determining Inventory Cost