This video discusses different inventory costing methods: First-In-First-Out (FIFO), Last-In-First-Out (LIFO) and average costing. The following is a part of the transcript. This video requires Flash 8 or above. If it does not start, click the play button to start.

Every company will maintain a certain level of inventory in order to meet the fluctuating demands from the customers. On one hand, inventory is a part of the current asset, so the valuation of the inventory will affect the company’s financial ratios. On the other hand, when part of the inventory is sold, it represents the Cost-Of-Good-Sold (COGS) in the income statement, which will affect the profitability of the company and the tax payable. Therefore, the profitability of a company and the financial ratios depend on the choice of the inventory costing methods. It is very important to understand the method used when analyzing financial statements.

Three of the basic costing methods are First-In-First-Out (FIFO), Last-In-Last-Out (LIFO), and average cost. If the cost of the inventory does not change over time, there will be no differences. Otherwise there will be differences.

Assume the cost is increasing, if FIFO is used, the COGS will be lower and the inventory will be higher.

If LIFO is used, the COGS will be higher and the inventory will be lower.

For average cost, it will be in-between.

Please see the video for more detailed explanation.