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Financial & Managerial Accounting
Found in: Page 259
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Describe how costs flow from inventory to cost of goods sold for the following methods: (a) FIFO and (b) LIFO.

FIFO: Cost of oldest inventory is allocated to COGS.

LIFO: The cost of the newest inventory is allocated to COGS.

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Step by Step Solution

Step 1: Definition of Cost of Goods Sold

The cost of goods sold is made up of the direct cost incurred by the business entity in the manufacturing process of the sold goods.

Step 2: Cost Flow in FIFO

Under the FIFO method, the cost incurred by the business entity to acquire the initial inventory is allocated to the cost of goods sold.

Step 3: Cost flow in LIFO

Under the LIFO method, the business entity will allocate the cost of the latest inventory to the cost of goods sold.

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