What is inventory rule?

An inventory rule is a method used by businesses to determine the value of their inventory for accounting purposes. There are several types of inventory rules, but the most common are First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and weighted average.

FIFO assumes that the first items purchased are the first items sold, while LIFO assumes that the last items purchased are the first items sold. Weighted average calculates the average cost of all inventory items, taking into account the quantity and cost of each item.

The inventory rule a business chooses can have a significant impact on their financial statements, particularly their cost of goods sold and inventory valuation. The choice of inventory rule may also be influenced by tax considerations, such as the LIFO conformity rule in the United States.

It is important for businesses to consistently apply their chosen inventory rule to ensure accurate financial reporting and compliance with accounting standards and regulations.