Question

Why does the accounting profession allow for multiple methods in accounting for inventory sold and on hand (LIFO, FIFO, weighted average, specific identification)? Can they all be right (i.e., accurately assign cost to goods sold and unsold)?

Answer 1

Companies use the inventory method that best fits their individual circumstances. However, this freedom of choice does not include changing inventory methods every year or so, especially if the goal is to report higher income

For instance LIFO method is used to match sale revenue with current cost of goods solds. This method reduces the tax profit of the company But it may allow the company to manipulate the income by changing the time of additional purchase.

The FIFO and specific identification methods result in a more precise matching of historical cost with revenue.However FIFO can give rise to paper profits whereas specific identification method leads to manipulation of income.Even weighted average method leads to manipulation of income.

Thus company uses the method which suited the circumstances of the company.Thus accounting professionals allow different accounting method of inventory sold and in hand because each method has it's on pros and cons and applicability in different scenarios.

Accuracy of the method depends on the business of the person.