Question

Most companies do use FIFO because it follows the natural flow of the purchases and provides a more accurate inventory valuation. So where does business strategy come into play? Discuss why some companies do use LIFO and the advantages it gives them.

Answer 1

ANSWER:

• In the given question, FIFO and LIFO methods of inventory valuation are compared.
• FIFO means First In First Out, that means the inventory which has first entered the business will be sold first and so on.
• Whereas, LIFO means Last In First Out, that means inventory that has entered last in the business will be sold first in place.
• FIFO is normally considered as most common inventory valuation method as it is in practical use , as normally the inventory which has first purchased is sold first due to various reasons
• Goods purchased first is sold first due to its perishable nature as goods may get wasted in longer period of time and the value of goods may reduce.
• Other reason is that it considers average price of goods as every time historical price of goods is taken

ADVANTAGES OF LIFO METHOD:

• Some companies does use LIFO method due to its advantages, it considers current market price of recent good purchased hence market inflation can not affect profitability
• Other reason is that the goods may be of such nature where actual goods are flowing in this manner, for example in mining business; the good are put one on one hence the recent goods will be delivered to the customer first.
• Price considered in this method is real time prise as daily updating is possible in this method hence it gives real profitability of particular goods in comparison with FIFO method.