For FIFO, LIFO, and Weighted-Average, the method describes the cost of the merchandise inventory sold, not the cost of what’s left—for example, with FIFO, the cost of goods sold will consist of the first (or old) costs and the ending merchandise inventory will consist of the last (or new) costs. 

FIFO, LIFO, and Weighted-Average are costing methods and may not be representative of the physical movement of merchandise inventory—for example, LIFO will result in “old” costs remaining in ending merchandise inventory—this does not mean that the “old” merchandise inventory is actually still on hand.

The Weighted-Average method is a weighted average computation based on the number of units for each cost level. Students may want to simply average the unit costs of merchandise inventory levels without taking into account the number of units at each level—for example, 2 units @ $10 and 1 unit @ $16 is an average (i.e., weighted average) cost of $12 ($36/3), not $8 (($10 + $16/ 2)).

The financial statement effect of choosing an inventory method depends on whether costs are increasing or decreasing. For example, the general description of LIFO is that it results in lower net income and lower inventory balances. However, this assumes increasing costs, which may not always be true in certain industries.

The term “market” in lower of cost or market means replacement cost, not the company’s retail sales price. Merchandise inventory may need to be written down due to LCM, but can’t be written back up at a later date, due to the conservatism principle.

When estimating merchandise inventory, the gross profit percentage must be subtracted from revenue to determine cost of goods sold. The estimated cost of goods sold can then be used to estimate ending merchandise inventory. For example, with a gross profit percentage of 40%, students may want to compute cost of goods sold as 40% of revenue, when it is really 60% of revenue. Also, point out that the estimated merchandise inventory can vary from actual due to an assumed gross profit percentage that may not be totally accurate.