Inventory Costing Methods

Inventory Costing Methods:

FIFO: First In First Out (LISH)

Results in the highest ending inventory, lowest COGS & highest Net Income

LISH = Last In Still Here (End Inv)

If costs are up, COGS understated and NI overstated.

So B/S is ok but I/S is not.

LIFO: Last In First Out (FISH)

Better represents cash flow.

FISH = First Items Still Here (End Inv)

If costs are up, COGS and Profit is ok, but End Inv is understated.

I/S is ok, but B/S is not.

Average Inventory Methods

1. Perpetual (Moving Avg) 

• computes the average after each purchase
• each transaction is processed as it happens

2. Periodic (Weighted Avg)

• Total Costs/ Total #