please respond to the below post.

There are four methods for inventory costing:, LIFO, FIFO, Weighted Average and Specific Identification. What are the differences between each method? How does each method affect the balance sheet and the income statement? What do I mean when I say that inventory costing methods are not related to the physical flow of inventory? Please give an example.

The differences between the four methods of inventory costing are: FIFO - Assumes cost flow in the order incurred; LIFO - Assumes costs flow in the reverse order incurred; Weighted Average - Assumes cost flow at an average of costs available; Specific Identification - Each item in inventory can be matched with a specific purchase and invoice as indicated in Financial & Managerial Accounting: Information for Decisions (Wild et al, 2017, p. 230).

How does each method affect the balance sheet and the income statement? FIFO - Assigns an amount to inventory on the balance sheet that approximates its current cost; it also mimics the actual flow of goods for most businesses; LIFO - Assigns an amount to cost of goods on the income statement that approximates its current cost; it also better matches current costs with revenues in computing gross profits; Weighted Average - Tends to smooth out erratic changes in costs; Specific Identification - Exactly matches the costs of items with the revenues they generate as indicated in Financial & Managerial Accounting: Information for Decisions (Wild et al, 2017, p. 235).

What do I mean when I say that inventory costing methods are not related to the physical flow of inventory? Please give an example.

Cost flow assumption does not have to match the actual physical flow of goods. Each inventory method entails certain cost-flow assumptions where an assumption about how costs are assigned to inventory in the accounting records. The assumptions bear no relation to the physical flow of goods and are merely used to assign costs to inventory units. The actual physical flow of the inventory may or may not bear a resemblance to the adopted cost flow assumption as listed on Inventory Costing Methods website along with the example below.

Example: Assume Gonzales Chemical Company had a beginning inventory balance that consisted of 4,000 units costing $12 per unit. Purchases and sales are shown in the schedule. Assume that Gonzales conducted a physical count of inventory and confirmed that 5,000 units were actually on-hand at the end of the year. Purchases were made on March 5 for 6000 units @ $16 each and September 7 for 8000 units @ $17 each. Unit sales were 7000 units @ $22 each on April 17 and 6000 units @ $25 each. Based on the information in the schedule, Gonzales will report sales of $304,000. This amount is the result of selling 7,000 units at $22 ($154,000) and 6,000 units at $25 ($150,000). The dollar amount of sales will be reported in the income statement, along with cost of goods sold and gross profit. How much is cost of goods sold and gross profit? The answer will depend on the cost flow assumption.

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