Understanding the concepts of inventory valuation is very important to the calculation and understanding of the profit figure as the profit figure can be manipulated by the use of different inventory valuation techniques. The three most common techniques used by the business are: • FIFO • LIFO • AVCO (average costing method) The FIFO method charges the first inventory to the sales pool thereby including the last inventory in the closing inventory figure. This results in a lower cost of sale figure and thus results in higher profits. On the other hand, the LIFO method charges the last goods to the sales pool, thereby including the first inventory in the closing inventory figure. This practice record the closing inventory at previous prices, therefore resulting in a higher cost of sale and in turn, low profits than FIFO. AVCO on the other hand, averages the first and last inventories and issues them to the sales pool at an average cost, thereby maintaining closing inventory at an average cost. This results in an averaged out cost of goods sold figure that gives profits between
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