|Uncle Joe Inc|
|Comparative Financial Statement|
|Partial Income Statements|
|Sales||$ 1,200||$ 1,200||$ 1,200|
|Cost of goods sold||$ 590||$ 550||$ 570|
|Gross Margin||$ 610||$ 650||$ 630|
|Partial Balance Sheet|
|Cash||$ 1,200||$ 1,200||$ 1,200|
|Inventory||$ 360||$ 400||$ 380|
|$ 1,560||$ 1,600||$ 1,580|
Note that the cost of goods sold on the income statement and the inventory on the balance sheet add up to $950 which is the amount Uncle Joe paid for his inventory. Regardless of what cost flow method you use, the total amount spent should equal the cost of goods sold + ending inventory. Remember all you are doing is simply allocating your costs between an expense (cost of goods sold) and asset (inventory).
The above example, assumes a deflationary environments where the price of inventory declined. In a inflationary environment, the impact of using LIFO versus FIFO is reversed.