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Describe the various methods of inventory valuation (FIFO, LIFO, and Weighted Average). How do these methods affect the cost of goods sold, ending inventory, and net income during periods of rising and falling prices?

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Final answer:

Explanation of FIFO, LIFO, and Weighted Average methods in inventory valuation and their effects on cost of goods sold, ending inventory, and net income during price changes.


Explanation:

Inventory valuation methods:

  1. FIFO (First In, First Out): Assumes that the first items purchased are the first sold.
  2. LIFO (Last In, First Out): Assumes that the last items purchased are the first sold.
  3. Weighted Average: Calculates the average cost of all items in inventory.

During rising prices, FIFO results in lower cost of goods sold, higher ending inventory, and higher net income. LIFO shows the opposite effect. Weighted Average provides values between FIFO and LIFO.

Conversely, during falling prices, FIFO leads to higher cost of goods sold, lower ending inventory, and lower net income. LIFO demonstrates the reverse impact, while Weighted Average falls in between.


Learn more about Inventory Valuation Methods here:

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