Question

Why do different organizations use different inventory valuation systems? Provide examples of which types of organizations are best suited for valuation approach. Explain your choices.

Answer 1

BECAUSE OF THE FOLLOWING POINTS ORGANISATION USES DIFFERENT METHODS OF INVENTORY SYSTEM:

There are different inventory methods like FIFO, LIFO, weighted average etc. and every method has its advantages and disadvantages on the basis of which different organisation chooses different methods according to their need. So here I am going to discuss advantages and disadvantages of various method:

WHY TO SELECT FIFO ( FIRST IN FIRST OUT )
* easy to use and apply
* no manipulation of income is possible
* balance sheet amount for inventory to approximate the current market flow
* company can not manipulate income because the cost of unit sold is not determined by any serial number.

WHY NOT TO SELECT FIFO
* it includes paper profits
* a heiver tax burden if used for the tax purpose in the period of inflation

WHY TO SELECT LIFO ( LAST IN LAST OUT )
The main advantages of LIFO method IS based on thIS fact SO that prices have risen over almost constantly for the decades. supporters of LIFO claim that this upward trend in the prices leads to the inventory, or to the paper. During the period of inflation, LIFO also shows that the largest cost of goods sold of the costing methods because of this newest costs charged to the cost of goods sold are also the highest costs. The larger the cost of goods to be sold, the smaller the net income.

WHY NOT TO SELECT LIFO
* In LIFO, cost of goods not sold matches the revenues.
* LIFO understates inventory
* LIFO also permits income manipulation.

AS I DISCUSSED ABOVE TWO VALUATION METHOD THAT IS FIFO AND LIFO. NOW I AM GOING TO DISCUSS WHICH TYPE OF ORGANISATION SHOULD CHOOSE FIFO AND WHICH TYPE OF ORGANISATION SHOULD CHOOSE LIFO:

FIFO is best suitable for those organisation those who want to use its oldest inventory first and dont want to use their fresh inventory if old is pending. and is best suitable for those who want to value their cost of goods sold at lowest price. example: organisation dealing with products which need to be sort out as soon as possible like organisations dealing dealing with perisable items

LIFO is best suitable for those organisation who want to use their fresh inventory instead of old one. it is best suitable for those who do not want to value their cost of goods sold at lowest price. example : it is best suitable for those organisation who do not want to sort out old stuff early like organisation dealing with liquior.