Inventory Cost Flow Methods

Inventory Cost Flow Methods

  • How do the shipping terms (FOB shipping point and FOB destination) affect ownership of goods?
  • What are terms and give an example of terms on an account.
  • Explain the basis of accounting for inventories and apply the inventory cost flow methods— FIFO, LIFO, and average–cost—under a periodic inventory system. Discuss the differences between the physical movement of goods and cost flow assumptions.


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  • Discuss the effects on the income statement and balance sheet and tax effects of each of the inventory cost flow assumptions—FIFO, LIFO, and average-cost.
  • What is the lower-of-cost-or-market (LCM) basis of accounting for inventories? Describe the application of LCM.
  • What is the inventory turnover ratio? How is it computed? How is it used by external users and management?
  • What is the LIFO reserve? Explain its importance for comparing results of different companies.

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