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beginning of the year to produce the total cost of the goods
available for sale during the year. That last total is then
allocated among items on hand at the end of the year (cost of
ending inventory) and items sold during the year (cost of goods
sold). The formula for determining cost of goods sold is
essentially as follows:
Cost of beginning inventory
+ Purchases and other acquisition or production costs
= Cost of the goods available for sale
- Cost of ending inventory
= Cost of goods sold
Various cost-flow assumptions are used to allocate the cost
of goods available for sale between goods sold during the year
and goods remaining on hand at the end of year. Two assumptions
generally used for financial accounting and tax purposes are
first-in, first-out (FIFO) and last-in, first-out (LIFO).3 Id.
par. 6.08[2], at 6-84. Under FIFO, it is assumed that the first
goods acquired or produced are the first goods sold and that the
goods remaining in ending inventory are the last goods acquired
or produced. Id. Under LIFO, it is assumed that the last goods
acquired or produced are the first goods sold.4 Id. We are
3 FIFO is authorized by sec. 1.471-2(d), Income Tax Regs.,
and LIFO is authorized by sec. 472.
4 The following example is based on an example in Gertzman,
Federal Tax Accounting, par. 7.02, at 7-4 (2d. ed. 1993) (cited
hereafter as Gertzman par. __, at __):
Example: Assume that, in its first year of operation, a
(continued...)
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