101 Concepts for the Level I Exam

Concept 51: Inventory Valuation Methods

The four inventory valuation methods are:

FIFO

The cost of the first item purchased is assumed to be the cost of the first item sold.
Ending inventory is based on the cost of the most recent purchases.

LIFO

The cost of the last item purchased is assumed to be the cost of the first item sold.
Ending inventory is based on the cost of the earliest purchases.

Weighted average cost

Each item in the inventory is valued using an average cost of all items in the inventory.
COGS and inventory values are between their FIFO and LIFO values.

Specific identification

Each unit sold is matched with the unit’s actual cost.
This method is usually used for items that are unique in nature, for example – jewelry.

All four methods are permitted under U.S. GAAP. However, IFRS does not permit LIFO method.