Question

What factions should be considered when choosing an inventory valuation method? In what situations are LIFO or FIFO more beneficial to a company and in what ways? When would specific identification be used?

Answer 1

The following are the factions that should be considered when choosing an inventory valuation method:

i. Ending Inventory

ii. Material Flow

iii. Deflation

iv. Internal Reporting

v. Financial Reporting

Situations when FIFO more beneficial to a company

a. The flow of materials is first in first out, meaning that the oldest items are taken off the shelf first allowing newer, fresher stock to be left on the shelves.

b.  Inflation as costs increase, so do the profits on parts that were purchased first, when prices were lower.

Situations when LIFO more beneficial to a company

a. In a period of deflation, your profits would increase and so would your tax liability by using LIFO method.

Specific identification method

The specific identification method is used to track individual items of inventory. This method is applicable when individual items can be clearly identified, such as with a serial number, stamped receipt date, bar code, or RFID tag.