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Discussion Question: Assume you own a restaurant, what inventory costing method below would you prefer and why? Also include a discussion as to whether the costing method you would use for your accounting records would follow the actual flow of your inventory.
Write a paragraph answering the information above. Choose one of the methods below to assist in answering the question:
Specific Identification Method
The specific identification method uses the specific cost of each unit of inventory to determine ending inventory and cost of goods sold. In the specific identification method, the company knows exactly which item was sold and exactly what the item cost. This costing method is best for businesses that sell unique, easily identified inventory items, such as automobiles (identified by the vehicle identification number [VIN]), jewels (a specific diamond ring), and real estate (identified by address)..
First-In, First-Out (FIFO) Method
Under the first-in, first-out (FIFO) method, the cost of goods sold is based on the oldest purchases—that is, the first units to come in are assumed to be the first units to go out (sold). FIFO costing is consistent with the physical movement of inventory (for most companies). That is, under the FIFO inventory costing method, companies sell their oldest inventory first.
Last-In, First-Out (LIFO) Method
Last-in, first-out (LIFO) is the opposite of FIFO. Under the last-in, first-out (LIFO) method, ending inventory comes from the oldest costs (beginning inventory and earliest purchases) of the period. The cost of goods sold is based on the most recent purchases (new costs)—that is, the last units in are assumed to be the first units sold. Under the LIFO inventory costing method, companies sell their newest inventory first.
Under the weighted-average method (sometimes called moving-average method), the business computes a new weighted-average cost per unit after each purchase. Ending inventory and cost of goods sold are then based on the same weighted-average cost per unit.