Editing Inventory (section)

===FIFO vs. LIFO accounting===
{{main|FIFO and LIFO accounting}}

When a merchant buys goods from inventory, the value of the inventory account is reduced by the [[cost of goods sold]] (COGS). This is simple where the cost has not varied across those held in stock; but where it has, then an agreed method must be derived to evaluate it. For inventory [[trade item|items]] that one cannot track individually, accountants must choose a method that fits the nature of the sale. Two popular methods in use are: FIFO (first in, first out) and LIFO (last in, first out).

FIFO treats the first unit that arrived in inventory as the first one sold. LIFO considers the last unit arriving in inventory as the first one sold. Which method an accountant selects can have a significant effect on net income and [[book value]] and, in turn, on taxation. Using LIFO accounting for inventory, a company generally reports lower net income and lower book value, due to the effects of inflation. This generally results in lower taxation. Due to LIFO's potential to skew inventory value, [[UK GAAP]] and [[International Accounting Standards|IAS]] have effectively banned LIFO inventory accounting. LIFO accounting is permitted in the United States subject to section 472 of the [[Internal Revenue Code]].<ref>[https://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapE-partII-subpartD-sec472.pdf Internal Revenue Code, § 472: Last-in, first-out inventories] {{webarchive|url=https://web.archive.org/web/20161223134628/https://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapE-partII-subpartD-sec472.pdf |date=2016-12-23 }}, accessed 23 December 2016</ref>