ACC 201 Module 4 Inventory Costing Short Paper example

One Turntable, Four Prices: Comparing FIFO, Weighted Average and LIFO for a Composite Independent Music Store

[Student Name]

Southern New Hampshire University

ACC 201: Financial Accounting

Module Four Short Paper

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

One Turntable, Four Prices: Comparing FIFO, Weighted Average and LIFO for a Composite Independent Music Store

The Store and the Data

Hollow Tree Records is a composite independent music store that sells used and new vinyl records and a small line of turntables. Its best-selling turntable is a single model that the owner buys from a distributor several times a year. Because the distributor raised prices four times in 2025, the store now holds identical turntables that cost different amounts, and the owner must decide which cost to assign to the units sold. The store uses a periodic inventory system, counting units at year end, and sells the turntable for 329 dollars.

During 2025 the store began with 12 turntables costing 180 dollars each and made three purchases: 20 units at 192 dollars in March, 25 units at 205 dollars in July and 15 units at 214 dollars in October. It had 72 units available for sale at a total cost of 14,335 dollars. It sold 58 units, producing sales revenue of 19,082 dollars, and counted 14 units on hand at December 31. The question is how the 14,335 dollars of cost should be divided between the 58 units sold and the 14 units remaining (Franklin et al., 2019).

First-In, First-Out

Under FIFO the earliest units bought are treated as the first ones sold, which leaves the latest purchases in the year-end count. The 14 units in ending inventory are costed at the October price of 214 dollars, for ending inventory of 2,996 dollars. Cost of goods sold is the cost of goods available minus ending inventory, 14,335 minus 2,996, or 11,339 dollars. Gross profit is 19,082 minus 11,339, or 7,743 dollars, a gross margin of 40.6 percent. This result also matches the store's physical practice, since staff sell the oldest boxes from the stockroom first so that warranty periods do not run out on the shelf.

Weighted Average

The weighted average method assigns every unit the same average cost, calculated by dividing the cost of goods available by the units available: 14,335 dollars divided by 72 units, or about 199.10 dollars per unit. Ending inventory is 14 units at that average, about 2,787 dollars after rounding, and cost of goods sold is 11,548 dollars. Gross profit is 7,534 dollars, a margin of 39.5 percent.

Last-In, First-Out

Under LIFO the most recent purchases are treated as the first ones sold, which means the year-end count is costed from the earliest layers. The 14 units on hand are costed at the beginning inventory price of 180 dollars, for ending inventory of 2,520 dollars, but only 12 units carry that cost, so the remaining 2 are costed at the March price of 192 dollars. Ending inventory is therefore 12 times 180 plus 2 times 192, or 2,544 dollars. Cost of goods sold is 11,791 dollars and gross profit is 7,291 dollars, a margin of 38.2 percent.

The Results Side by Side

Table 1 compares the three methods.

Table 1

Turntable Results Under Three Inventory Costing Methods, 2025

Note. Composite figures. Weighted average cost is $199.10 per unit, rounded.

Why the Methods Differ

The methods do not change how many turntables were sold or what customers paid; they change only which costs are matched against that revenue. Because prices rose all year, FIFO matches the older, cheaper costs against current sales and leaves the newest, highest costs on the balance sheet, so it reports the highest profit and the most current inventory value. LIFO does the reverse, matching the newest costs against current revenue, which gives a better picture of current margins but leaves ending inventory at outdated costs. The weighted average falls between the two. The 452 dollar gap between FIFO and LIFO gross profit is not a difference in how the store performed; it is a difference in how the same performance is measured. With only one product line and modest price increases, the gap is small, but for a business with large inventories and steady inflation it can be substantial, and it compounds over years under LIFO as old cost layers remain on the books.

Tax, Reporting and Practical Trade-Offs

Taxes are the usual reason businesses choose LIFO in periods of rising prices, because higher cost of goods sold means lower taxable income. For Hollow Tree, the 452 dollar difference would save the owner roughly 108 dollars of tax at a 24 percent marginal rate. The saving comes with conditions. Under the LIFO conformity rule, a business that uses LIFO for tax purposes must also use it in the financial statements it gives to owners and lenders (Inventories, 2018), so the store could not show its bank the higher FIFO profit while paying tax on LIFO profit. LIFO is also not permitted under International Financial Reporting Standards (International Accounting Standards Board [IASB], 2003), which matters for companies that report outside the United States. Finally, LIFO requires tracking cost layers year after year, which adds bookkeeping work for a small store.

FIFO has the opposite profile. It reports higher profit and a balance sheet inventory value closer to current replacement cost, which helps when the owner applies for credit, and its cost flow matches how the store physically sells turntables, oldest boxes first. Its disadvantage is higher taxable income while prices are rising.

Recommendation

For Hollow Tree Records, FIFO is the better choice. The tax saving from LIFO is small because turntables are a minor part of the business, the added recordkeeping would cost more in the owner's time than it saves, and FIFO produces a balance sheet and gross margin that better represent the store's current position to the bank that finances its seasonal inventory. Whatever method the owner chooses, it must be applied consistently from year to year, and any change must be disclosed, because the value of comparing one year's margin with the next depends on the same method being used in both.

References

Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of accounting, volume 1: Financial accounting. OpenStax. https://openstax.org/details/books/principles-financial-accounting

International Accounting Standards Board. (2003). IAS 2 Inventories. IFRS Foundation.

Inventories, 26 U.S.C. § 471-472 (2018).