Question

Illustrate with an example how comparability concept/assumption may be applied to accounting for inventory.

Answer 1

Definition of Comparability concept/assumption-

The comparability concept of accounting states that the users of financial reports of a business must be able to compare these reports with previous years’ reports as well as with reports of other entities dealing in the same industry.

Example-:

If a company that retails leather jackets valued its inventory on the basis of FIFO method in the past, it must continue to do so in the future to preserve consistency in the reported inventory balance. A switch from FIFO to LIFO basis of inventory valuation may cause a shift in the value of inventory between the accounting periods largely due to seasonal fluctuations in price.

Note-

"FIFO" stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first but do not necessarily mean that the exact oldest physical object has been tracked and sold.

"LIFO" stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first.