Sales revenue differs when using LIFO, FIFO, or average cost methods due to the varying assumptions about the cost of inventory sold. LIFO assumes the last units bought are sold first, FIFO assumes the first units bought are sold first, and the average cost method divides total cost by total units for a consistent cost per unit.
The difference between the sales revenue using the LIFO (Last-In, First-Out), FIFO (First-In, First-Out), and average cost methods lies in how they account for the cost of goods sold (COGS). When using the LIFO method, it is assumed that the latest units purchased are the first to be sold, and therefore, COGS reflects the most recent purchase prices. Conversely, the FIFO method calculates COGS based on the oldest inventory, assuming those were the first sold, utilizing earlier purchase prices. The average cost method divides the total cost of goods available for sale by the total units available for sale, assigning a consistent cost to each unit sold, thereby yielding the average cost per unit.
These inventory valuation methods can have a significant impact on the reported sales revenue, especially in times of inflation or deflation. LIFO can result in higher COGS and lower profits when prices rise, whereas FIFO can show higher profits due to lower COGS from older, possibly cheaper inventory. The average cost method smooths out price fluctuations over time, providing a middle-ground approach between LIFO and FIFO. It's important to note that while these methods can affect the calculation of profits, they do not directly change the total revenue, which is the total income from sales and is calculated as: Total Revenue = Price x Quantity.