Why are there different methods of valuing inventory?
Companies have a choice of inventory valuation methods. They can choose the method that provides the results they want to achieve in the financial statements. Each method assumes a different order of cost flows. If the cost of units stays the same during any given accounting period, all three methods yield the same ending inventory values and net income figures. When prices change, however, each method yields different results in the short run (and sometimes long run as well). In periods of rising prices, the fifo method yields the highest amount for ending inventory, the lowest cost of merchandise sold, and the highest net income. In periods of rising prices, the lifo method yields the lowest ending inventory , the highest cost of merchandise sold, and the lowest net income. In periods of declining prices the effects stated in the above two sentences would all be the opposite. The average cost method yields results that are in between those of fifo and lifo. During periods of rising p
