discussion 2.docx - Identify the differences between...

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Identify the differences between F.I.F.O., L.I.F.O. and Average Cost method of inventory valuation. Be sure to include the effects of each method on Cost of Goods Sold and Net income in your answer. Also discuss the differences between the physical movement of goods and cost flow assumptions. F.I.F.O. means first in, first out, and accepts that the initial goods purchased are the first to be sold, it equals the actual physical flow of merchandise because it usually is good business practice to sell the oldest units (Kimmel, Weygandt, & Kieso, 2016, p.17.1). Businesses who use the FIFO method would have a figure of cost based on what the final inventory is, then the company would take the unit cost of the latest purchase and work backward until everything in inventory have been costed (Kimmel, Weygandt, & Kieso, 2016, p.17.1). A good example for FIFO would be a donut shop who produces twentydozen donuts opening Sunday morning and sales them for $10 a dozen, and then another twenty dozen the following day for $8 a dozen. Through the FIFO method it would be shown that if the donut shop sold twenty dozen of donuts on Tuesday then the cost of goods sold would be $10 per dozen, because $10 per dozen was the initial cost per dozen at the beginning of the week and the first 20 dozen of donuts. The lower end of $8 per dozen would then be taken into account at the end of inventory.

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