Читать книгу Corporate Finance For Dummies - Michael Taillard - Страница 117

To make a product or provide a service, a company has to purchase supplies. Maybe a tool manufacturer needs to buy steel. Maybe a window washing company needs to buy soap and water. Maybe a tutoring company just needs to pay its tutors. No matter what its primary operation is, every company adds up all the direct costs it incurs as a result of actually making its product or service, not including indirect costs (sales costs, administrative costs, research costs, and so on), and includes them under cost of goods sold (COGS) on the income statement. The very nature of this section lies within its name: It’s the cost a company has incurred in making or buying the goods that it has sold.

Just like the price of beer changes at the store from time to time, the costs of those things a company purchases can change. So when the things a company purchases change, it must choose how it will measure the cost of goods sold. The two primary ways a company can account for the costs of goods sold are

 FIFO (first-in, first-out): With this method, a company will use the costs of those things it purchased earliest when accounting for COGS. In other words, the first inventory made or bought is the first inventory to be sold.

 LIFO (last-in, first-out): With this method, a company will use the cost of those things it purchased most recently when accounting for COGS. In other words, the most recent inventory made or bought is the first inventory to be sold.

Because the value of inventory minus costs influences all other financial statements, a company must choose to use either FIFO accounting or LIFO accounting and stick with it for everything. If a company chooses to switch from one method to another, it must describe the change, including the calculated change in value resulting from the change in method. It describes this change in the supplementary notes of at least the income statement and typically all the other financial statements, as well.