Question

compare and contrast inventory valuation methods and the impact of each on the financial reporting of the organization?

Answer 1

Answer-

There are mainly three inventory valuation methods used under GAAP-

1-FIFO Method

2-LIFO Method

3-Weighted Average Method

The main similarity among above three methods is, all of them are accepted under US GAAP.

And all three methods are used to determine the value of inventory at the end of a financial period.

Now let us discuss the significance of these methods.

1-FIFO or First in First out

As the name suggests, under this valuation method oldest produce or purchased item is supposed to be sold first.

Under this method we have inventory of latest items.

When there is inflation, the value of inventory is always high and COGS is less resulting greater profit compare to other methods.

On the other hand when there is deflation in prices, the value of inventory down and the COGS is up resulting in lesser profit in books.

The method is accepted In GAAP as well as in IFRS.

2-LIFO or Last in First out

As the name suggests, we supposed to oust the latest produce from inventory.

Using this method we have the inventory of oldest items.

When there is inflation in the market, the value of inventory is always low and COGS Is high resulting lesser profit in books

When there is deflation in the market, value of inventory is always high and COGS is lesser resulting in higher profit in the books.

LIFO method is not accepted in IFRS.

3-Weighted Average method

Under this method the value of inventory is achieved by averaging the cost of an item produced or purchased during the period.

Inflation or deflation doesn't effect the inventory valuation or the book profit compare FIFO and LIFO methods.

This method is accepted in GAAP and IFRS.