Question

talked about the two systems used to track inventory purchases and sales. This week, we're talking about the four methods of valuing our inventory: Specific Identification, FIFO (first-in, first-out), LIFO (last-in, first-out), and Weighted Average. Each method can be used in the Perpetual Inventory System or in the Periodic Inventory System, and each method can be used for specific types of inventory. Following the new business ownership you adopted last week, please answer the two questions below about these costing methods.

---Which inventory valuing method would you like to pick and why?

---Do you think there is a need to conduct a physical count to your inventory? Why? What would be the proper procedure?

Answer 1

Question 1:

I would like to pick First in First Out method of valuing inventory.

FIFO presumes that the goods which are purchased first will be the ines which are sold first.

The reasons are as follows:

1. The theory perfectly matches with the actual flow of goods in godown.

2. It results in higher inventory, lower cost of sales and higher net income.

3. It is easy to comply.

4. The stock value in balance sheet probably reflects the valuation in market thereby decreasing the probability of manipulation.

Question 2:

There is a need to conduct physical count of inventory due to following advantages:

1. Possibilities of fraud taking place can be found out.

2. Any material weaknesses in the system of handling inventory can be identified and rectified.

3. Verification of accuracy of stock records can be done.

There are three methods of doing physical verification to inventory. They are periodicverification,perpetual verification and surprise verification.

Among the three methods the most popular method of physical count is perpetual physical verification because all the items of stock are verified once a year with the help of predetermined program.