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Entering inventory into the books

September 1st, 2008 / By: / Ask the Experts

Question: My accountant wants to know how I would like to enter my inventory into the books. How do other marine shops do this?

Answer: We talked to our own accounting department and were told that there are four systems commonly used: FIFO, LIFO, Average Cost and Specific Identification Pricing.

FIFO stands for “first in, first out.” This type of accounting assumes that the first goods purchased are the first goods sold. In other words, the cost of the first of the inventory you use is charged to the cost of the goods when the goods are sold. LIFO is an acronym meaning “last in, first out,” meaning an assumption is made that the last goods purchased are the first goods sold. In the LIFO method, the costs of the most recently purchased inventory are the first costs charged to the goods sold. In the Average Cost method, the total cost of goods available is divided by the total units available for sale, giving an average unit cost that can be applied to the units in inventory. Lastly, the Specific Identification Pricing method attaches the actual cost to an identifiable unit of product.

We polled more than 150 members of the Marine Fabricators Association, asking how they kept their books. We found many canvas shops are too small to keep inventory; instead ordering and billing per job, which would seem to fit with the Specific Identification Pricing method. Of those that reported using a formal accounting system, there was a slight preference for the Average Cost system, but fabricators seemed evenly spread between the other three methods. To determine which method makes most sense for your business, discuss the pros and cons with your accountant.

Juli Case is IFAI’s information and technical services manager.

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