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In: Accounting

If a company chooses to implement LIFO for its cost-flow assumption in its accounting system, does...

If a company chooses to implement LIFO for its cost-flow assumption in its accounting system, does this necessarily mean that the flow of the actual product out of the warehouse is being done in a "LIFO-like manner"??

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Expert Solution

  • NO, if a company chooses LIFO for accounting its inventory, it DOES NOT necessarily mean that the flow of the actual product out of the warehouse is being done in a “LIFO like manner”.
  • LIFO means “Last in First Out”, which when explained means that the units that are purchased last or the latest purchases, are to be sold or issued first.
  • This however does not necessarily means that units sold or issued are from the latest purchases.
  • LIFO is the method to value the ending Inventory and find out the cost of Goods Sold.
  • If LIFO is being used, the cost of ending Inventory will be based on EARLIEST purchases or even beginning inventory unit price, because under this, it is assumed that units sold are from latest purchases, and hence the ending inventory MUST be from the earliest stock.
  • Therefore, it does not necessarily mean that the actual product out of warehouse is based on LIFO like manner. There might be a possibility of this if the company is usig perpetual method. But Under periodic system, if a LIFO is being opted, it just for the purpose of Cost Flow and valuing inventory.

ekkarill92 answered 2 years ago
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