Method of cost in inventory

You can change your company's method of cost in inventory, if you find it necessary, after your first year in business.

There are two cost methods for your financial statements. One method is FIFO (first-in, first-out), which sells the oldest items in inventory first. This method assumes costs associated to manufacture or acquire your current inventory are similar to those of the merchandise recently sold. When using the FIFO method, your inventory generally is represented in lower levels with a higher cost for the items.

An alternative to the FIFO method is LIFO - the last-in, first-out cost of inventory. With LIFO, the most recent merchandise is sold before the products previously sitting on the shelves. The LIFO method generally will represent your inventory lower at the end of the year and your expenses higher than the FIFO system. Therefore, the valuation of your company is different, depending on the cost method you use. Investors need to compare your year-over-year financial statements to determine the viability of your operation, which is why it's important to maintain consistency.