Inventory Accounting: LIFO, FIFO and Weighted Average

So before buying your new accounting software you should consider several things.

The good thing about using accounting softwares if you are a business is the time it can save you. In Accounting, there are three techniques used to manage inventory. Inventory is all the goods or items held available by a business. LIFO is generally used by organizations that have very large inventories and with inventory prices that are stable or slightly rising. LIFO is also more efficient in matching current costs with current revenues. The keeping of old inventory can also result in aged, obsolete inventory. LIFO liquidation is when a company has to liquidate its older cheaper inventory. This allows an organization to clear out its older inventory, which prevents the aging of items and lowers the possibility of inventory decay and inventory liquidation. The older inventory they are getting rid of is limited and if inventory prices rise their profits will fall. Due to higher reported profits this method results in higher taxable income on inflated profits. FIFO can also become confusing if and when an organization makes multiple purchases but at different prices. Those companies who have large inventories of undifferentiated product use the weighted average method. This method is generally in between LIFO and FIFO in regards of profit recording, FIFO reports the highest, LIFO the lowest and weighted average in the middle of the two. Weighted average usually refers to the cost flows of inventory, and usually not their physical , (2010).; Last In, First Out – FIFO. Retrieved , (2010). First In, First Out – FIFO. Retrieved , (2010). Weighted Average.