Question

FIFO and average cost are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory, explain the difference in ending inventory values under the FIFO and average cost bases when the price of inventory items purchased during the period have been (1) increasing, (2) decreasing, and (3) remained constant.

Answer 1

FIFO leaves the newer, more expensive inventory in a rising-price environment, on the balance sheet, and less expensive inventory in a decreasing-price environment comparing to average cost method. Under constant prices the result will be the same for both methods.