How Do You Calculate LIFO & FIFO?
Inventory represents the value of goods available for sale that a company is holding. Inventory is calculated according to the following formula: ending inventory = beginning inventory + net purchases — cost of goods sold. Corporate managers and investors closely monitor the value of a company’s inventory to determine how quickly the company sells the goods it produces. A growing inventory balance suggests that the company is not producing goods that people want; additionally, carrying a large inventory balance reduces the company’s cash flow since producing the inventory costs money. There are a number of ways to calculate inventory, but the two most popular are the last-in-first-out (LIFO) method and the first-in-first-out (FIFO) method. Under LIFO, the newest units in inventory are assumed to be sold first, so the cost of goods sold is based on the most recent inventory costs. Under FIFO, the oldest units are assumed to be sold first, so the cost of goods sold is based on historica
