Question

What are 6 benefits and risks of using a LIFO delivery system in a healthcare setting.

Answer 1

LIFO - LAST IN FIRST OUT . It is an inventory method used in managing the inventory cost of an organisation.

# The benefits of LIFO are:-

1.It matches most recent cost against current revenue = it helps in reducing inventory profit by matching the cost against current revenue and results in reduction of understatement of cost of goods sold and overstatement of profit .

2. Tax benefit = when LIFO is used in periods of inflation, the current purchases at higher price is matched with revenue, that alleviate overstatement of profit hence decrease income tax.

3. Improvement of cash flow = by reducing the income tax by overstatement of profit , it helps in the flow of cash.

4. It minimize write down to market = under the method of LIFO , the inventory purchased at higher price is sold out first so, the chances of write down in future due to decline in price are minimised or eleminated.

5. Physical flow of inventory = because where we use LIFO as a correspondence to physical flow of inventory ,cost flow is rare to identify.

6. Increase the reliability and quality of earning .

# The risks associated with LIFO are:-

- reduced earning in inflationary time .

- understatement of profit because of the use of oldest cost.

- LIFO liquidation means company buy large quantities at a time ,hence poor buying habits among companies.

- manipulation of the earnings