Question

The valuation of inventory follows a consistent application of FIFO, LIFO, or weighted average methods. Manufacturing, merchandising, and retail companies use different valuation methods based on the products they are selling. As the CPA conducting an audit: Select a current company that uses one of these methods. Explain why the method is appropriate. Explain the significant accounting policies and practices that will be used with the inventory valuation method.

Answer 1

Suppose the current company under audit follow FIFO method of inventory valuation :

FIFO : First in First Out-

i} it is based on the assumption that the sale or usage of goods follows the same order in which they are bought.

ii} the earliest purchased or produced goods are removed and expensed first. Therefore, the most recent costs remain on the Balance Sheet, while the oldest costs are expensed first.

iii} FIFO is also called last -in-still-here {LISH}

Why the Method is appropriate ?

i } Balance Sheet valuation is of High Quality : It does not affect the most recent purchases , thus providing high-quality information about the valuation of inventory.

ii} Best represent the actual flow of goods in a business.

iii} FIFO gives the most accurate picture of costs and profitability.

GENERALLY ACCEPTED ACCOUNTING PRICIPLES { GAAP } & { IFRS}

The GAAP accepts the three most common inventory valuation methods { given in question } while IFRS does not accept the LIFO method .

So, in countries where IFRS is followed , FIFO is not restricted.

Under the GAAP , inventory is recorded at cost or market value - whichever is less.