Question

General Motors and Ford use the last-in, first-out (LIFO) method to value their inventories. Honda (of Japan) and Daimler-Benz (manufacturer of Mercedes-Benz of Germany) use the firstin, first-out (FIFO) method. Under LIFO, recent costs are expensed as cost of goods sold; under FIFO, older costs are expensed as cost of goods sold.

Required:  Given the income statement effects of LIFO versus FIFO, how will the balance sheet inventory amounts differ between General Motors and Ford versus Honda and DaimlerBenz? In other words, will inventory be reported amounts representing recent costs or older historical costs?  In your opinion, which balance sheet amounts would be more useful to financial statement users in making decisions to buy or sell shares of a company’s stock?

Answer 1

FIFO and LIFO are the methods of inventory management and these are used by every organisation.
These methods greatly affects the organisation's financial statements to an extent.

Inventory will be reported amounts representing recent costs as these costs are to be considered in the financial statements.

For any investor, the balance sheet which contains recent costs (amounts) would be more useful to financial statement users in making decisions to buy or sell shares of a company’s stock than the balance sheet which contains the historical costs.

Examples are provided in the statements as :

General Motors and Ford use the last-in, first-out (LIFO) method to value their inventories. Honda (of Japan) and Daimler-Benz (manufacturer of Mercedes-Benz of Germany) use the firstin, first-out (FIFO) method. Under LIFO, recent costs are expensed as cost of goods sold; under FIFO, older costs are expensed as cost of goods sold.