The LIFO example presented later in this documentation further illustrates this process.īecause the LIFO method's purpose is to reflect the inventory value accumulation or depletion at the end of the year, the entries that are logged at the end of each period need to be adjusted to remove the effect of any accumulation or depletion. The stored information allows the system to allocate the closing inventory, starting with the current period and allocating to prior periods. ![]() The system stores the total purchase quantity, amount, and average price for each period of the year. Thus, the opening inventory is always the same regardless of what transpired in the prior period, because the prior period's entries are reversed. The reversals every period also keep the opening inventory constant until the end of the year. This reversal is done for all periods except for the last period of the year. To facilitate this type of processing, when the system applies this method for each period, the prior period's entries are reversed, making the new entries the current year-to-date values. The LIFO method values inventory based on the activity that occurred on a year-to-date basis instead of a rolling (carry forward) inventory balance. The LIFO costing method values inventory using some unique processes that are important to point out: Second, this method requires that the system records historical costs for all years with stock remaining for that year. This method results in an ending inventory balance based on the costs associated with the oldest inventory. That is, the inventory that has been in stock the shortest amount of time is sold first. ![]() This costing method determines the stock value and cost of goods sold based on the sale of the newest stock first. The LIFO costing method assumes that the last inventory items purchased are the first ones sold. ![]() A.2 Last In/First Out (LIFO) Calculations
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