Definition of Inventory Methods
Inventory methods refers to the order or manner in which a company moves its actual costs out of the current asset inventory and to the cost of goods sold, which is reported on its income statement.
Since the costs of products may be higher when they are reordered/purchased, the order in which their costs are removed from inventory will have an impact on the inventory valuation and the amount reported as the cost of goods sold (and therefore the gross profit, operating income, net income).
The order in which the costs are removed from inventory is referred to as the cost flow assumption. It is important to understand that the cost flow does not have to agree with the order in which the goods are physically removed from inventory.
Examples of Inventory Methods
The following are only a few of the many cost flow assumptions used for valuing inventory:
- What is FIFO?”>First-in, first-out (FIFO)
- What is LIFO?”>Last-in, first-out (LIFO)
- Weighted average
- Dollar-value retail
Where to Find a Corporation’s Inventory Methods
The inventory methods and cost flow assumptions used by a corporation (with shares of common stock that are publicly traded) can be found in the corporation’s Summary of Significant Accounting Policies contained in its annual report to the Securities and Exchange Commission (SEC) Form 10-K. The Summary is likely the first or second item in the Notes to the Financial Statements.
Most publicly traded corporations have an Investors Relations link on their website’s home page. On the Investors Relations page you will find a link to the corporation’s annual SEC filings.
