Question

General Motors and Ford use the last-in, first-out (LIFO) method to value their inventories. Honda (of Japan) and Daimler-Benz (manufacturer of Mercedes-Benz of Germany) use the firstin, first-out (FIFO) method. Under LIFO, recent costs are expensed as cost of goods sold; under FIFO, older costs are expensed as cost of goods sold.

Required:  Given the income statement effects of LIFO versus FIFO, how will the balance sheet inventory amounts differ between General Motors and Ford versus Honda and DaimlerBenz? In other words, will inventory be reported amounts representing recent costs or older historical costs?  In your opinion, which balance sheet amounts would be more useful to financial statement users in making decisions to buy or sell shares of a company’s stock?

Answer 1

Under LIFO method goods purchased last are sold first. Which means that goods which are purchased last will be calculated in the cost of goods sold and the remaining inventory in this method will be the purchaes made first or the beginning inventory.

Under FIFO method goods purchased first are sold first. which means that the cost of goods sold in include all those purchase which are made at the beginning or a beginning inventory so the ending inventory in this method will be from the Purchase made at last.

Therefore as General motors and Ford uses LIFO method for inventory valuation therefore there balance sheet will show different valuation of closing inventory as compared to Honda and Daimler Benz as they are following FIFO method.

Under FIFO method inventory reported represent the recent cost as it will include all the purchases made at last. Whereas in LIFO method inventory will represent historical cost is the inventory made from the beginning inventory for the purchases made at first.

As per my opinion FIFO method valuation inventory used by Honda and Daimler Benz will be more useful as it gives the recent cost of inventory in balance sheet which is a better way of reporting in the financial statement as per the standards.

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