Companies are not allowed to report inventory costs by assuming which units of inventory are sold and which units still remain on hand.
12. Using the first-in, first-out method (FIFO), the first units purchased are assumed to be the first ones sold.
13. Using the weighted-average cost method, the average cost of inventory is calculated as the average unit cost of inventory purchased during the year.
14. Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold.
15. For most companies, actual physical flow of their inventory follows LIFO.
16. During periods of rising costs, FIFO generally results in a higher ending inventory balance.
17. During periods of rising costs, FIFO generally results in a higher cost of goods sold.
18. During periods of rising costs, LIFO generally results in a higher cost of goods sold.
19. During periods of rising costs, LIFO generally results in a higher ending inventory balance.
20. Accountants often call FIFO the balance sheet approach because the amount it reports for ending inventory better approximates the current cost of inventory.
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