Question

What are the three primary methods to assess ending inventory?

Answer 1

Three primary method of valuating closing inventory are as follows -

First in First out (FIFO) Method

FIFO is the most popular method of an inventory valuation, which is based on assumption that the material first received or purchased are the first to be sold or issued. It means, closing stock is out of the last or latest received or manufactured goods.

Last-in-First-Out Method (LIFO)

This method of inventory valuation is exactly opposite to first-in-first-out method. Here it is assumed that newer inventory is sold first and older remains in inventory. When prices of goods increase, cost of goods sold in LIFO method is relatively higher and ending inventory balance is relatively lower.

Average Cost Method (AVCO)

Under average cost method, weighted average cost per unit is calculated for the entire inventory on hand which is used to record cost of goods sold. Weighted average cost per unit is calculated as follows:

Weighted Average Cost Per Unit=	Total Cost of Goods in Inventory
Total Units in Inventory