How Inventory Method Affects Financial Statementsĭuring an inflationary period, the weighted average method will result in a profit yield somewhere in between LIFO and FIFO. How is the Weighted Average Inventory Method Affected by Inflation? The exact opposite is the case in a deflationary period. So, selling off new goods first yields a lower margin that the LIFO or specific identification method. The cost of new goods is higher than that of older goods. In an inflationary period, LIFO (or Last-in, First Out) will result in a lower immediate profit margin. How is LIFO Inventory Method Affected by Inflation? The exact opposite is true in a deflationary period. So, selling off older goods first will result in a higher profit margin. The cost of older goods will be lower than the cost of newer goods. In an inflationary period, FIFO (or First-in, First Out) will result in higher immediate profit margins. How is FIFO Inventory Method Affected by Inflation? As such, inflation and deflation are not going to change specific identification. Specific notification will always yield the results that are dependent on which units are sold. You now know that you are ending this year with 152,500.00 worth of inventory. The effect of each method is discuss below.īack to: Accounting & Taxation How is the Specific Identification Method Affected by Inflation? To calculate ending inventory, you use the formula: Ending inventory Beginning Inventory + Net Purchases COGS. As such, these occurrences have an effect on the financial statements and how inventory is reported. In an inflationary period is when the value of a currency decreases and, thus, the price of goods rise. Update Table of Contents How Does Inflation and Deflation Affect Profitability of Product Sales? How is the Specific Identification Method Affected by Inflation? How is FIFO Inventory Method Affected by Inflation? How is LIFO Inventory Method Affected by Inflation? How is the Weighted Average Inventory Method Affected by Inflation? How Does Inflation and Deflation Affect Profitability of Product Sales?
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