Q22RQ - Horngren'S Financial And Managerial Accounting

Question

Describe how the FIFO method is different from the weighted-average method.

Step-by-Step Solution

Answer

FIFO and the weighted average method are the inventory valuation model. The main difference between these is that goods purchased firstly are sold on a priority basis in the FIFO method. In the weighted average method, inventory is sold at an average rate at the average inventory level.

Step-by-Step Solution: Step 1: Inventory

Inventory means the goods or materials, hold by the company either for sale of for using in production process. It is classified as the current assets in the company’s balance sheet.

Step 2: FIFO

Under the First in, first-out method of inventory valuation, the first purchased goods are sold first in the market. It is the accounting method used by the company to value its inventory. Companies use this method to clear out their oldest inventory on a priority basis.

Step 3: Weighted average method

Under weighted average method, the total cost of the inventory available for sale in the market is divided by the total number of the inventory to compute the weighted average cost of the units sold.