Can you please explain Inventory Accounting (FIFO/LIFO/AVCO)?

First-in-first-out (FIFO)

Defined: The oldest inventory asset is recorded as sold first – regardless of the actual shelf-age of the given physical asset.

Applied: While it is the most widely used accounting technique in periodic inventory management today, FIFO may fail to offer a full picture of inventory value if inflation and price increases are not closely analyzed. Thus, FIFO may inflate or deflate the actual value of future inventory.

Last-in first-out (LIFO)

Defined: The newest inventory asset is recorded as sold first.

Applied: The LIFO method could reduce a company’s tax responsibility in times of growing inflation – but it has been heavily regulated under the International Financial Reporting Standards.

Average cost or weighted cost (AVCO)

Defined: The AVCO (average cost) method will take the total cost of goods still available for sale and divide it by the total sum of product from the beginning inventory and purchases.

Applied: With the AVCO method, cost flow is determined as a weighted average of all total unit costs.