Every item in inventory is purchased at a specific cost. In MyBooks, the value of serialized inventory is re-computed with the actual cost of each individual item as it is sold. For all other inventory items (i.e., non-serialized items), a 'cost flow assumption' is much more convenient, accepted, and used. The three most used cost flow assumptions (or costing methods) are:

FIFO - First-in, First-out, involves the assumption that goods sold are the first units that were purchased, the oldest goods on hand. The inventory remaining is comprised of the most recent purchases.

LIFO - Last-in, First-out, the inventory sold is assumed to be those most recently acquired. The remaining inventory is assumed to consist of the earliest purchased. This is the most widely used method.

Average cost assumes all merchandise (units sold and those that remain in inventory) at the average per-unit cost. Because this is a "running" or "moving" average cost, the inventory valuation will probably not exactly match the General Ledger account for Inventory. Note: In MyBooks, a new average cost of an item is recalculated each time an inventory item is purchased or sold. This is additional information that does not affect the costing of the items. The cost method selected by a company need not correspond to the actual physical movement of the company's merchandise. The use of a costing method eliminates the need for separately identifying each unit sold and looking up its actual cost. Experience has shown that these cost flow assumptions provide useful and reliable measurements of the cost of goods sold, as long as they are applied consistently to all sales of the particular type of merchandise. [Turn it up a notch...]