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A major part of financial reporting is the determination of the cost of the ending merchandise inventory. There are four methods that can be used and each method will generate a different outcome and each is used according to a businesses needs. A company that could use all four may be Costco. Since they sell a variety of different
1. Specific identification is practical when a company can positively identify which particular units were sold and which are still in ending inventory. Specific identification would be used for companies like auto dealers where they can keep specific records because each auto has a VIN number.
. The weighted average method means that the costs of sales are determined by the average cost of the items were purchased determined at the time of sale. The weighted average is mainly used by gas stations. When new gasoline is purchased it is mixed in the tank with the previous gasoline.
. First-in, first out, (FIFO) method assumes that the first unit making its way into inventory is the first sold. FIFO should be used where inventories (particularly perishables) are kept.
4. Last in-first-out (LIFO) is the opposite of FIFO. This method assumes that the last unit making its way into inventory is sold first. The outdated inventory is therefore left over at the end of the accounting period.
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