Concept introduction:
Requirement-a:
To discuss: The cost flow from inventory to cost of goods sold for the FIFO method.
Explanation of Solution
The FIFO (first in first out) method assumes that the inventory purchased first is sold first. In other words, this method assumes that the inventories are sold in the same sequence as their sequence of purchase. The inventory purchases are recorded date wise and when goods are sold, the cost of goods sold is calculated by taking the cost of the oldest inventory purchase.
Concept introduction:
Inventory valuation is done using several methods. These methods are FIFO (first in first out) method, LIFO (last in first out) method, weighted average, and specific identification method. Each method has its assumption and the valuation of the inventory and cost of goods sold are done using that assumption.
Requirement-b:
To discuss: The cost flow from inventory to cost of goods sold for the LIFO method.
Explanation of Solution
The LIFO (last in first out) method assumes that the latest inventory purchased is sold first. In other words, this method assumes that the inventories are sold in the opposite sequence of their sequence of purchase. The inventory purchases are recorded date wise and when goods are sold, the cost of goods sold is calculated by taking the cost of the latest inventory purchase.
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Chapter 5 Solutions
Financial Accounting: Information for Decisions
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