- Use the Internet to research the annual report of at least one (1) merchandising company. Determine which costing method (Last In First Out [LIFO], First In First Out [FIFO], or weighted average cost) that is used to record inventory by your selected company.
- Identify the three (3) primary advantages and three (3) primary disadvantages of using the costing method (LIFO, FIFO, and weighted average) that is used to record inventory.
- Provide support for your response.
REPLY to students statement down below also
I found the 2015 Annual Report for Amazon. They use the FIFO Method.
First in, first out (FIFO) assumes the first goods purchased are the first ones sold. This is used in determining cost of goods sold. They in all actuality may not be the first goods sold, but are considered so. Ending inventory is based on prices of those items that were bought most recent. When prices are rising, this method is preferable as it leads to higher net income. However, that also leads to higher income taxes.
Last in, first out (LIFO) assumes the most recent items bought will be first to be sold. When figuring out costs of goods sold, they look at the most recent price. This practice rarely coincides with the actual flow of goods sold. Ending inventory is based on prices of those bought first. If prices are falling, this method will report the highest net income. This method used in rising prices will also result in the lowest income taxes.
Weighted average uses the average costs of units available for sale. This is found by dividing the total costs of goods available for sale by the total number of units for sale.
One of the advantages to using these types of systems is there is it extremely hard, if not impossible, to use specific identification in inventory/costs of goods.
“Inventory Assumptions” retrieved from https://youtu.be/9ruxEEf_xZM
Weygandt, J., Kimmel, P., & Kieso, D. (2013). Accounting Principles, Volume 1 (11th ed.). Hoboken, NJ: John Wiley & Sons.