ACC E113 Lecture Notes - Lecture 28: Financial Accounting Standards Board, Weighted Arithmetic Mean, Financial Statement
Document Summary
Financial statement effects of inventory costing methods: To understand why managers choose between fifo and weighted-average cost methods in different circumstances, we must first understand their effects on the statement of earnings and financial position. The methods differ only in the portion of goods available for sale allocated to cost of sales versus ending inventory. For that reason, the method that gives the highest cost of ending inventory also gives the lowest of sales and the highest gross profit, income tax expense, and net earnings amounts and vice versa. Assuming the price to the customer is constant, when unit costs are rising, the weighted-average cost method produces lower net earnings and a lower inventory valuation than fifo. When unit costs are declining, the weighted-average cost method produces higher net earnings and a higher inventory valuation than fifo. Fifo: cost of sales (lower), gross profit, net earnings and ending inventory (higher)
