Question

Do you agree or disagree, pls explain.

The key is that the company would need to disclose for example which inventory method they are using (FIFO vs LIFO) and the user or individuals who receive the information would need to know and understand the impact of each on financial statements. Comments?

Answer 1

Agree with the statement

A company publishing its financial statements needs to disclose the method of inventory accounting used by in Notes to accounts. The method followed can be either FIFO or LIFO. A method of inventory accounting helps in understanding how inventories are accounted in financial statement and how it impacts the profits during the period. In FIFO method of inventory accounting first purchased lots are issued to cost of goods sold and latest lot purchased will represent the inventory balance. But in case of LIFO method of inventory accounting latest purchased lots are consumed and initial lots will remain in inventory balance at the end of the period

Below table summarizes the affect on financial statement

	FIFO	LIFO
Inventory valuation	Inventory is valued at latest price	Inventory is valued at earlier prices
Cost of Goods sold	Cost of goods sold will lower when purchase price keeps increasing	Cost of goods sold will be higher when purchase price keeps increasing
Affect on profit	Profit will be higher compared to LIFO when purchase prices keeps increasing and vice versa	Profit will be lower than FIFO when purchase price keeps increasing and vice versa

From Shareholders’ point of view it is important to understand the impact of inventory accounting method on financial statements as it impacts the profits reported in financial statement. A FIFO method of inventory accounting usually reports higher profits in financial statements compared to LIFO method of inventory accounting. Also the inventory is carried over from one period to another hence to that extent profit in another period will be lower or higher depending on inventory valuation. Hence shareholders need to understand the inventory accounting method used since it will have material impact on the profits/losses reported in financial statement.