How can I choose the best inventory method?
The choice that the inventory method for use can be important to society because it generally has an impact on balance sheet, financial statement and taxes. The company's inventory usually includes raw materials that will be used to produce products, along with goods in the process of standing finished products and finished products themselves. The company's inventory usually includes a significant part of the total assets. There are three main methods for calculating inventory: last-in, first-out (LIFO); First-in, first-out (FIFO); and the average cost method. Since the cost of raw materials may change over time, even during the same accounting period, the company must usually determine what costs are associated with the income they earn; This can help them choose the best inventory method.
Using the method for the last time in the first power, the cost of the last unit of the purchased stock is deducted from the price for which the company sells the finished product. The difference is tzisk when selling the finished product. This method leaves all previously purchasedThe units of raw materials in the inventory and the inventory value are determined using older unit costs.
On the other hand, some companies select the first inventory method. Using this method, the company determines its profit by deducting the cost of the first inventory purchased from the price for which it sells the finished product. Using this method, all later purchased raw material units are left in the inventory. The inventory value is therefore determined using newer unit costs.
The third option is an average cost method. With this approach, the Company will first determine the average cost of each unit in its inventory. This amount is then used to calculate the profit using the same approach as the other two methods. The average costs are also used to determine the value of the remaining units in the inventory.
Most companies choose which inventory method to use on the basis ofWhether there is a significant overall increase in the costs of goods and services - also known as inflation. The LIFO method generally shows lower profits and inventory values, while the FIFO method usually shows higher profits and inventory values. If the economy is in the period of inflation, LIFO is generally preferred because it reduces the amount of taxes that the company has to pay. The opposite applies in periods of deflation.