Accounting Demystified

Things to Keep in Mind

Inventory represents goods on hand that will be sold in the future (hopefully the very near future). When the goods are sold, the cost is transferred from Inventory to Cost of goods sold. Specific identification is a method that directly associates the amount it cost to acquire the particular item sold (the amount put into Inventory) with the cost transferred to Cost of goods sold.

In many (even most) cases it is not possible to directly track when an item from a particular shipment is sold. We therefore need to select a cost flow assumption. There are three choices of cost flow assumption: FIFO, LIFO, and weighted average. FIFO and LIFO assume that the goods sold were either the first ones purchased (FIFO) or the last ...