Inventory and COGS - Inventory flow

7 important questions on Inventory and COGS - Inventory flow

Why is inventory flow so important?

Inventory is the largest asset, and COGS is the largest expense, for many businesses.

What is one important rule about a company's cost flow approach?

It must be consistently applied.

Which are the methods of assigning cost to items?

Specific identification
LIFO
FIFO
Weighted average
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Which two accounts are involved in assigning costs to items that are sold?

Inventory and COGS

What sort of goods are best suited to a weighted average costing method?

When many similar items are sold, perhaps in bulk

What is a disadvantage of FIFO?

It often results in higher income, and therefore higher taxes.

Which method of valuation is most conservative?

LIFO, since it gives the inventory the lowest valuation most of the time.

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