Two companies report the same cost of goods available for sale but each employs a different cost formula. If the price of goods has increased during the period, then the company using

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FIFO (First-In, First-Out) assumes that the first items purchased are the first items sold, so in a period of increasing prices, the cost of goods sold will reflect the lowest prices. This results in a higher ending inventory balance. The weighted average cost formula takes into account the average cost of all items purchased during the period and applies that cost to units sold and units remaining. It does not distinguish between first-in and last-in items, so it will not result in a higher ending inventory balance in a period of increasing prices.

Two Companies Report the Same Cost of Goods Available for Sale