Inventory Cost Method
December 2013 / PhreeBooksR36RC3
Author – Charles
Decisions on what is the appropriate Inventory Cost Method for your sort of business will need to be made with your accountant.
Once you have decided on the correct Inventory Cost Method to be employed in your company, it should not be changed lightly. Normally, there are strict rules enforced by your taxing authority covering how and when you can change – expect to have to fill in some forms to fulfill your statutory reporting requirements. Once again – talk to your accountant BEFORE attempting to change your Inventory Cost Method.
COMPANY > Module Administration > Inventory Module > Cost Method on right-hand-side.
|FIFO||First-In-First-Out: An item’s unit cost is the actual value of any receipt of the item, selected by the FIFO rule.In inventory valuation, it is assumed that the first items placed in inventory are sold first.||In business environments where product cost is stable.(When prices are rising, the balance sheet shows greater value. This means that tax liabilities increase, but credit scores and the ability to borrow cash improve.)For items with a limited shelf life, because the oldest goods need to be sold before they pass their sell-by date.|
|LIFO||Last-In-First-Out: An item’s unit cost is the actual value of any receipt of the item, selected by the LIFO rule.In inventory valuation, it is assumed that the last items placed in inventory are sold first.||Disallowed in many countries, as it can be used to depress profit.(When prices are rising, the value on the income statement decreases. This means that tax liabilities decrease, but the ability to borrow cash deteriorates.)|
|An item’s unit cost is calculated as the average unit cost at each point in time after a purchase.For inventory valuation, it is assumed that all inventories are sold simultaneously.||In business environments where product cost is unstable. When inventories are piled or mixed together and cannot be differentiated, such as chemicals.|
FIFO, seemingly used by Dave in his business and also seemingly the ‘default’ setting in PhreeBooks, is only a recent addition to some other popular commercial accounting packages (perhaps – I’m guessing here – because it is complicated). I think that Quickbooks only introduced a core FIFO option into their inventory in 2012 – before that it included only the ‘average cost’ method – FIFO was only available through a “third party add-on product that manages inventory entirely outside of QuickBooks“.
PhreeBooks uses Perpetual AVCO for the Average Cost method.