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6&&(:9S(_`=```(%<'0+?&"(1+%#0*+$'(LOVE(,&$-(→

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=11>0?
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)+(@1<@@8(]<'0(4"#%0*%#1=
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$+0=(09&"&(*'($+(+$& S+<(#7"&&(0+(+<"(4"*>#%S
V"*790W(#$':&"(0+(09&'&(X<&'0*+$'=(;&%#<'&(+@(09&(>#"*+<'(*$>&$0+"S(%+'0*$7 4+1*%S8

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E$(09*'(4+'0=(:&U11(&341+"&(09&(-*@@&"&$0(:#S'(@+"(>#1<*$7("&0#*1('0+%B8(59&%B(09&?
+<0(;&1+:(#$-('&&(:9*%9(+$&(*'("*790(@+"(S+<"(;<'*$&''8

What are the different inventory costing methods

in retail?
1. The retail method
F9&(0"#-*0*+$#1(:#S(+@(9#$-1*$7(#%%+<$0*$7(*'(B$+:$(#'(09&("&0#*1(?&09+-=(#
4"+%&''(*$(:9*%9(S+<(&'0*?#0&(09&(>#1<&(+@(S+<"(&$-*$7(*$>&$0+"S(;S(@#%0+"*$7
*$(09&(%+'0(0+("&0#*1(4"*%&("#0*+8(F9&(:&;'*0&(Y%%+<$0*$7(2341#*$&-(:#1B'(<'
09"+<79(09&(4"+%&''Z

!"#$%%#&'(#)(&*+,#-*,.(#/0#1/.)#2(3+44+43#+4-(4&/)1#*4%#)(&*+,#-*,.(#/0#5)/%.6&7
5.)6'*7(%#&/#%(&()8+4(#&'(#)(&*+,#-*,.(#/0#&'(#8()6'*4%+7(#*-*+,*2,(#0/)#7*,("

9"#:(%.6&#1/.)#&/&*,#7*,(7#%.)+43#&'*&#5()+/%#0)/8#&'(#)(&*+,#-*,.(#/0
8()6'*4%+7(#*-*+,*2,(#0/)#7*,("

7!6154281@
;"#<*,6.,*&(#&'(#6/7&#&/#)(&*+,#5)+6(#)*&+/#.7+43#&'(#0/)8.,*=

# 5+"+$#>*"<'(/&'+<"%&'(M_`Q
# 5<'0+?&"(234&"*&$%&(Ma`eQ
# 2>&$0'(MaaeQ
# !&#0<"&-(MOQ
# E$>&$0+"S(K#$#7&?&$0(MNdQ
# L#"0$&"'(MdaQ
>'()(? # L+*$0(+@(6#1&(MOkQ
# /&0#*1(F*4'(p(F"&$-'(MNkaQ
##!#+7#&'(#6/7&#/0#2(3+44+43#+4-(4&/)1@ # 6#1&'(p(K#"B&0*$7(MalOQ
# 6&%<"*0S(M_Q
##"#+7#&'(#6/7&#/0#+4-(4&/)1#5.)6'*7(%#+46,.%+43#+46+%(4&*,#6/7&7#7.6'#*7#0)(+3'&A # 60#@@*$7(p(60+"&
+4@ K#$#7&?&$0(Ma`lQ
# 6<%%&''(60+"*&'(M_ekQ
####+7#&'(#)(&*+,#-*,.(#/0#2(3+44+43#+4-(4&/)1@#*4% # 6<">*>+".'(G<*-&(0+(09&
/&0#*1(Y4+%#1S4'&(MeQ
##$#+7#&'(#)(&*+,#-*,.(#/0#3//%7#5.)6'*7(%#%.)+43#&'(#5()+/%
# F&%9$+1+7S(p([?$*%9#$$&1
MkeQ
B"##C.,&+5,1#&'(#%+00()(46(#0)/8#7&(5#9#*4%#&'(#6/7&#&/#)(&*+,#)*&+/#&/#/2&*+4
# ,&$-(%+?4#$S(?*1&'0+$&'
(7&+8*&(%#6/7&#/0#(4%+43#+4-(4&/)1" MlOQ
# ,&$-(g4-#0&'(M_dNQ
F9&("&0#*1(?&09+-(*$>+1>&'(#('<"4"*'*$7(#?+<$0(+@(&'0*?#0*+$(#;+<0(S+<"
# I9#0.'()&:(*$(,&$-(MNNQ
*$>&$0+"S=('+(*0U'($+0(#1:#S'(09&(?+'0(#%%<"#0&(:#S(0+(%#1%<1#0&(S+<"(%+'0'8

!+"0<$#0&1S=(:*09(09&(#->&$0(+@(*$>&$0+"S(?#$#7&?&$0('S'0&?'=(*0U'($+:(?<%9 21@4A271@
&#'*&"(0+(@*7<"&(+<0(:9#0(*$>&$0+"S(S+<(#%0<#11S(9#>&8(Y'(#("&'<10=(?+'0("&0#*1&"'
$+:(<'&(?+"&(?+-&"$(*$>&$0+"S(%+'0*$7(?&09+-'('<%9(#'((!E![=(DE![=(#$- # E$>&$0+"S(K#$#7&?&$0
:&*790&-(#>&"#7&8 G<*-&

# L[6(A<S&".'(G<*-&
D&0U'(0#1B(#;+<0(9+:(0+(<'&(&#%9(+@(09&'&(?&09+-'(#$-(:9*%9(;<'*$&''&'(09&S
:+"B(;&'0(@+"8 # /&0#*1(nLE'(G<*-&
# 6#1&'(F&%9$*X<&'(G<*-&
2. Specific identification method
# 2?#*1(K#"B&0*$7(G<*-&
F9&('4&%*@*%(*-&$0*@*%#0*+$(?&09+-(*'(4&"9#4'(09&(?+'0('0"#*790@+":#"-(:#S(0+ # /&0#*1(2%+??&"%&(G<*-&
%#1%<1#0&(*$>&$0+"S(%+'0'8(I9&$(<'*$7(09*'(?&09+-=(S+<(#00#%9(09&(&3#%0(%+'0(+@
# F+4(_`(/&0#*1(Y44'
%"&#0*$7(#$(*0&?(0+(09#0('#?&(*0&?8
# /&0#*1(c*%0*+$#"S
The specific identification method requires being able to follow a particular
# F9&(/&0#*1(F*4'(G&$&"#0+"
product exactly through its time with your business by using serial numbers
# /&0#*1(F"&$-'(@+"(_`ak
or otherwise tagging the item. Because of this, specific identification is best
used for luxury retailers selling such unique and expensive items as jewelry # /&0#*1(E$@1<&$%&"'(_`aP
or cars.

R&"&U'(9+:(09&('4&%*@*%(*-&$0*@*%#0*+$(?&09+-(1++B'($<?&"*%#11S=(<'*$7(# '4004=&A@
\&:&1&"U'(#'(#$(&3#?41&Z
$ % & '
F868(]&:&1&"U'(9#'(#0(09&(;&7*$$*$7(+@(09&(S&#"Z

!#%+*8/4%#4(6D,*6(#E#F9GG 6!5@

!#(8()*,%#4(6D,*6(#E#FHGG
YccC[)6 Yc,E6[/6

!#2)*6(,(&#E#F!GG YLY5 Yg5nDY)c

Yg6F/YDEY
!#5*+)#/0#(*))+437#E#F!IG
5g6F[K2/L/[!ED26
!#3/,%#)+43#EF;IG
25[KK2/52

!#%+*8/4%#)+43#E#FIGG 2,2)F6 2oL2/F

%&'()*+,-.,'&/0*1&2'3*45666 !Y6RE[) !2YFg/2c

R[K2(Y)c(GE!F
Y0(09&(&$-(+@(09&(S&#"=(F868(]&:&1&"U'(9#'('+1-(09&(-*#?+$-($&%B1#%&=(09&
;"#%&1&0=(#$-(09&(-*#?+$-("*$78(F9&S(9#>&(#--&-(0+(09&*"(%+11&%0*+$(#('#449*"& R[K2IY/2(p(GE!F

"*$7(#0(^_``8(F9&("&'<10(1++B'(1*B&(09*'Z E),2)F[/f

a(-*#?+$-($&%B1#%&(b(^_``((M6[DcQ ELYc D[)c[)

KY)YG2K2)F

D[fYDFf KY/62DD[
a(&?&"#1-($&%B1#%&(b(^d``
K2DA[g/)2 K[AED2
a(;"#%&1&0(b(^a``(M6[DcQ
KgDFEC6F[/2

a(4#*"(+@(&#""*$7'(b(^aN` )2I(q2YDY)c

LY/F)2/ LY/F)2/6
a(7+1-("*$7(b^ON`
LYfK2)F6
a(-*#?+$-("*$7(b(^N``(M6[DcQ
L[E)F([!(6YD2 L[6

a('#449*"&("*$7(b(^_`` L/[K[FE[)6

Total ending inventory cost: $1400 rgE5nA[[n6

/2L[/FE)G /2FYED
F+(@*7<"&(+<0(S+<"(4"+@*0=(S+<U-(\<'0('<;0"#%0(09#0(&$-*$7(*$>&$0+"S(%+'0(@"+?(09&
#?+<$0('+1-8(D&0U'('#S(09#0(09&(\&:&1"S('+1-(0+0#1&-(^N```(*$('#1&'8(F9#0(:+<1- /2FYED(2,2)F6

?#B&(F868(]&:&1&"U'(#$$<#1(4"+@*0(^Oe``8 /2FYED(6g55266

f+<(%#$('&&(09&(1*?*0#0*+$'(9&"&8(f+<($&&-(0+(;&(#;1&(0+(0"#%B(&>&"S('*$71&(*0&?= /2FYED6g55266

:9*%9(?#B&'(09&(4"+%&''(0*?&C%+$'<?*$78(E@(S+<(?#''C4"+-<%&(*0&?'=(S+<(?#S 6R[LE!f
@*$-(09#0(09&"&(#"&(;&00&"(:#S'(+@(%+'0(#%%+<$0*$7(@+"(S+<8
6E)GD2C6F[/2

L1&#'&($+0&(09#0(:9*1&(09&('4&%*@*%(*-&$0*@*%#0*+$(?&09+-(*'(09&(?+'0(1+7*%#11S 6g55266(6F[/E26
'0"#*790@+":#"-(+<0(+@(09&(+09&"(4"+%&''&'=(*0(*'($+0($&%&''#"*1S(09&(?+'0
6gLL[/F gn g6
#%%<"#0&8(F9#0U'(;&%#<'&(09&('4&%*@*%(*-&$0*@*%#0*+$(?&09+-(%#$(#11+:(@+"('+?&
?#$*4<1#0*+$(+@(09&($<?;&"'(:9&$(09&"&(#"&(*-&$0*%#1(4"+-<%0'(#0(-*@@&"&$0 g6Y ,2)c
%+'0'8(A&%#<'&(&#%9(+@(09&(*0&?'(*'(09&('#?&(0+(09&(%<'0+?&"=(09&("&0#*1&"(?#S
,2)c2/([!(FR2(I22n
%9++'&(0+('&11(M+"("&4+"0('&11*$7Q(09&(*0&?(:*09(#(9*79&"(%+'0(*$(+"-&"(0+(1+:&"
4#4&"(4"+@*08(( IRYF.6()2I(E)(,2)c

o2/[
3. FIFO
g4($&30(:&(9#>&(09&
?&09+-(Y?#h+$(<'&'(i
!E![8

!E![('0#$-'(@+"(V@*"'0(*$=
@*"'0(+<0=W(#($#?&(:9*%9
#%%<"#0&1S(-&'%"*;&'(09&
?&09+-8(It assumes that
the first purchased
goods are also the ones
that are sold first.
Therefore, your
remaining stock would
be valued at the most
recently incurred costs.
As a result, the costs
listed on your balance sheet should be quite close to their value in the
current marketplace.

D&0U'('#S(S+<U"&(#(7"+%&"8([$(K+$-#S=(S+<(#%X<*"&-(N(+"#$7&'(@+"(^`8a`(&#%98
[$(F<&'-#S=(#$+09&"(N(+"#$7&'(%+'0(S+<(^`8_`8(Y$-(+$(I&-$&'-#S=(S+<(7+0(#
@*$#1(N(@+"(^`8_N8([$(F9<"'-#S=(S+<('&11(a`(+"#$7&'8(G*>&$(09#0(+"#$7&'(7+(;#-=
S+<(#''<?&(09#0(%<'0+?&"'(#"&(;<S*$7(K+$-#SU'(+"#$7&'(@*"'0(#$-('+(+$8(D&0U'
-+(09&(?#09(<'*$7(09&(!E![(?&09+-(0+(@*7<"&(+<0(S+<"("&?#*$*$7(*$>&$0+"S
%+'0'(+$(F9<"'-#S=(#'(:&11(#'(:9#0(S+<"(4#4&"(4"+@*0(:+<1-(;&8

:*1#!=#5.)6'*7(%#I#/)*43(7#E#FG"!G#(*6'

:*1#9=#5.)6'*7(%#I#/)*43(7#E#FG"9G#(*6'

:*1#;=#5.)6'*7(%#I#/)*43(7#E#FG"9I#(*6'

:*1#B=#7/,%#!G#/)*43(7#E#F!"GG#(*6'

I*09(09&(!E![(?&09+-=(S+<(#''<?&(09+'&(a`('+1-(+"#$7&'(#"&(N(@"+?(09&(@*"'0
-#S(#$-(N(@"+?(09&('&%+$-(-#S('+(S+<('+1-(^a8N`(:+"09(+@(*$>&$0+"S=(:9*1&
;"*$7*$7(*$(^a`(*$('#1&'=("&'<10*$7(*$(^P8N`(*$(4"+@*08(f+<"("&?#*$*$7(*$>&$0+"S(*'
#11(:+"09(^`8_N(&#%9=('+(S+<(9#>&(^a8_N(*$(+"#$7&'(1&@0(0+('&118

!E![(*'(09&(?+'0(4+4<1#"(?&09+-(*$0&"$#0*+$#11S(#$-(?#B&'('&$'&(@+"(09&(:#S
?#$S(;<'*$&''&'("<$8(E0(*'(#1'+(09&(?+'0(4"&%*'&(?&09+-(#'(*0(-+&'($+0(#11+:(@+"
#$S(?#$*4<1#0*+$(+@(09&($<?;&"'8

4. LIFO
DE![(*'(09&(+44+'*0&(+@(!E![(#$-('0#$-'(@+"(j1#'0(*$=(@*"'0(+<08U(E0U'(%<""&$01S(09&
*$>&$0+"S(?&09+-(<'&-(;S(F#"7&08(E$(09*'(%#'&=("#09&"(09#$(#''<?&(S+<U"&
'&11*$7(S+<"(@*"'0(#%X<*"&-(4"+-<%0'(@*"'0=(S+<(#''<?&(S+<U"&('&11*$7(S+<"(?+'0
"&%&$01S(M1#'0Q(#%X<*"&-(4"+-<%0'(@*"'08

F+(%1#"*@S(:9#0(09*'(1++B'(1*B&=(1&0U'(*?#7*$&(S+<U"&(09&('#?&(7"+%&"(:*09(09&
'#?&(+"#$7&'(#'(#;+>&=(+$1S(09*'(0*?&(:&U11(<'&(09&(DE![(?&09+-(0+(-&0&"?*$&
*$>&$0+"S(%+'0'(#$-(4"+@*08

:*1#!=#5.)6'*7(%#I#/)*43(7#E#FG"!G#(*6'

:*1#9=#5.)6'*7(%#I#/)*43(7#E#FG"9G#(*6'

:*1#;=#5.)6'*7(%#I#/)*43(7#E#FG"9I#(*6'

:*1#B=#7/,%#!G#/)*43(7#E#F!"GG#(*6'

F9*'(0*?&=(:&(#''<?&(09#0(09&(+"#$7&'(S+<('+1-(:&"&(09&(a`(@"+?(-#S'(_(#$-(O8
F9#0(?&#$'(@+"(09&(^a`(S+<(?#-&(*$('#1&'=(S+<(9#-(0+('4&$-(^_8_N=("&'<10*$7(*$
#(4"+@*0(+@(^d8dN8(f+<"(N("&?#*$*$7(+"#$7&'(#"&(@"+?(-#S(a=(1&#>*$7(S+<(:*09
^`8N`(:+"09(+@(+"#$7&'(0+('&118

f+<(%#$('&&(:9#0(#(-*@@&"&$%&(DE![(?#B&'(*$(09&(@*$#1("&'<108(2>&$(09+<79(S+<
9#-(#11(09&('#?&(>#"*#;1&'=(S+<(&$-(<4(:*09(#('?#11&"(4"+@*08 Why would anyone
use LIFO if it results in them making a smaller profit? The main reason is that
with a smaller profit, businesses tend to have to pay less in taxes. That’s also
the reason LIFO is barred by International Financial Reporting Standards. A
secondary reason you would want to show a smaller profit is that during
times of inflation, LIFO can give you a good idea of how your profits are
comparing to rising current costs.

A&S+$-(0#3(4<"4+'&'=(09+<79=(DE![(%#$('&">&('+?&(;<'*$&''&'($&&-'(:&118
5&"0#*$(%+?4#$*&'(?#S(#%0<#11S('&0(09&*"('0+%B(<4(*$(#(:#S(09#0(09&(4"+-<%0'
09#0(%+?&(*$(1#'0("&#11S(-+(7+(+<0(@*"'08(Y$(&3#?41&(09#0(\<?4'(0+(?S(?*$-(*'(#
?<1%9(:9+1&'#1&"8(K<1%9=(:9&09&"(;#77&-(+"(1++'&=(0S4*%#11S(7&0'(09"+:$(*$0+(#
;*7(4*1&8(I9&$(#('#1&(+@(?<1%9(*'(?#-&=(09&("&0#*1&"(-+&'$U0(-*7(0+(09&(;+00+?(+@
09&(4*1&(0+(@*'9(<4(09&(+1-&"(?<1%98(F9&S(\<'0('&11(09&(?<1%9("*790(@"+?(09&(0+48

Y'(#($+0&Z(I9&$(S+<(<'&(DE![(@+"(%+'0(#%%+<$0*$7=(S+<(8.7&(#1'+(<'&(*0(@+"
@*$#$%*#1("&4+"0*$78

7.('8/.9*:.2&8/1.

J(4%K7#LM6(,#+4-(4&/)1#*4%#7*,(7
&(85,*&(#'(,57#1/.#7&*1#/4#&/5#/0
1/.)#+4-(4&/)1#*4%#7*,(7#21
5.&&+43#-+&*,#)(&*+,#%*&*#*&#1/.)
0+43()&+57"

>(#6/85+,(%#7/8(#/0#&'(#8/7&
+85/)&*4&#8(&)+67#&'*&#1/.#7'/.,%
&)*6D#+4#1/.)#)(&*+,#2.7+4(77?#*4%#5.&#&'(8#+4&/#(*71A&/A.7(#75)(*%7'((&7
&'*&#(8'&;('+1())0*1()18)('.*;.'/+12*281<*(2*=>:?@A*1&,-./2+&,*/('.A
2'&1B*'8/,A*;(/C+,2A*(,9*;&/."

01!2.&3421

5. Weighted average
F9&(@*$#1(?#*$'0"&#?(%+'0(#%%+<$0*$7(?&09+-(*'(09&(:&*790&-(#>&"#7&(?&09+-=
:9*%9(*'(<'&-(;S(A&'0(A<S8(E0(*'('+?&0*?&'(B$+:$(#'(09&("+11*$7C#>&"#7&
?&09+-8(D*B&(09&($#?&(*?41*&'=(S+<(0#B&(09&(#>&"#7&(+@(09&(%+'0'(S+<U>&(@#%&-
:9&$(#%X<*"*$7(#('&0(+@(*0&?'8(Y'(S+<(#--($&:(4"+-<%0'(0+(S+<"(*$>&$0+"S=
S+<U11(#-\<'0(S+<"(#>&"#7&(%+'08

D&0U'(7+(;#%B(0+(09&(7"+%&"(&3#?41&Z

:*1#!=#2/.3'&#I#/)*43(7#E#FG"!G#(*6'

:*1#9=#2/.3'&#I#/)*43(7#E#FG"9G#(*6'

:*1#;=#2/.3'&#I#/)*43(7#E#FG"9I#(*6'

$-()*3(#6/7&#/0#!I#/)*43(7=#FG"!N#(*6'

:*1#B=#7/,%#!G#/)*43(7#E#F!"GG#(*6'

F9*'(0*?&=(:&U11(0#B&(09&(%+'0(+@(09&('+1-(+"#$7&'(0+(;&(^a8P`=(1&#>*$7(S+<"
4"+@*0'(#0(^k8_`(#$-(S+<"("&?#*$*$7(*$>&$0+"S(%+'0'(#0(^`8P`8

)+:=('#S(S+<(#--(#(l09(-#S(+@(+"#$7&'(#0(^`8_a=(09*'(*'(9+:(09&(?#09(%9#$7&'
<$-&"(09&(:&*790&-(#>&"#7&Z

:*1#!=#I#E#FG"!G

:*1#9=#I#E#FG"9G

:*1#;=#I#E#FG"9I

:*1#B=#I#E#FG"9!

$-()*3(#6/7&#/0#9G#/)*43(7=#FG"!O

c#S(lZ(a`(b(^a8``(M'+1-(+"#$7&'Q

Now the cost of the same sold oranges as before is $1.90, so your profits
become $9.10. Your new remaining inventory costs are $1.90.

F9&(:&*790&-(#>&"#7&(?&09+-('9+<1-(;&(<'&-(:9&$(#11(+@(S+<"(4"+-<%0'(#"&
'+(*-&$0*%#1(0+(&#%9(+09&"(09#0(09&(%+'0(-*@@&"&$0*#1(*'($&71*7*;1&8(Y(7++-
&3#?41&(*'(#(7#'('0#0*+$8(2>&"S(0*?&(09&(7#'('0#0*+$("&'0+%B'(09&(7#'+1*$&=(09&
$&:(7#'+1*$&(;&%+?&'(?*3&-(:*09(09&(+1-(7#'+1*$&8(59#$%&'(#"&=(%<'0+?&"'
"&#11S(#"&(;<S*$7(#(1*001&(+1-(7#'(#$-(#(1*001&($&:(7#'8

Please note that, of the methods listed in this article, the weighted average
method is the only one the IRS is picky about. In order to file your taxes
under the weighted average method, you must recalculate the average
every time you add inventory or on a monthly basis AND meet one of the
following criteria:

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How to choose the right inventory costing method

for your business
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1. For some businesses, the way you sell your inventory will clearly
determine your cost accounting. /&'0#<"#$0'=(7"+%&"'(#$-(+09&"(;<'*$&''&'
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28(Ef you’re looking to lower your tax burden during a time of inflation, don’t
go with FIFO(#'(*0(*'(09&(?+'0(4"&%*'&(?&09+-(#$-("&4+"0'(09&(9*79&'0(*$%+?&8
DE![(:*11("&4+"0(09&(1+:&'0(*$%+?&=(:9*1&('4&%*@*%(*-&$0*@*%#0*+$(#$-(09&
:&*790&-(#>&"#7&(?&09+-(;+09(@#11(*$(;&0:&&$8

3. If you want to keep precise track of your historical costs compared with
revenue, FIFO or the specific identification methods are both good options.

4.(If you’d rather compare revenue with the current costs of goods, which
can be useful during times of inflation, you’ll want to use LIFO.

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01!2.&3421

Wrap-up
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