Chapter 8 Lecture Notes: Valuation of Inventories

I. Inventory Definition & Planning/Control

A. Definition of Inventory
 Asset items held for sale in the ordinary course of business or goods that will be used
or consumed in the production of goods to be sold.

B. Planning & Control

 Since revenue is derived from the sale of inventory, management must devote
significant attention to the planning and control of inventory.

1. Effect on Operating Cycle

Cash

a) Quicker sale of inventory

Accounts Inventory
Receivable  Speeds up the operating cycle
 Cash available quicker

b) Slower sale of inventory

 Slows Down Operating Cycle
 Tight up cash

2. Mark-up of Inventory
a) Higher mark-up
 May spend higher gross profit and higher net profit
 May also results in slower/fewer sales that ultimately reduce profitability
 If competition has lower price OR
 If general demand is slow due to higher price

b) Lower mark-up
 May result in lower gross profit and lower net profit
 May also result in faster sales that ultimately increase profitability
 If the competition prices are higher
 If general demand is higher due to lower price

3. Impact of Too Much or Too Little Inventory

a) Excessive inventory
 Ties up resources (thus, reducing liquidity)
 Risk that inventory will become obsolete => write-down on Income
Statement

b) Inadequate inventory
 Risk that sales will be lost if not be able to keep up with demand

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 Chapter 8 Lecture Notes: Valuation of Inventories

II. Classification and Cost Flow

A. Classification
1. Merchandising Company/Merchandise Inventory
 A merchandiser purchases finished goods and resells them.
 Called “Merchandise Inventory” on balance sheet.
 Generally shown as one line item under current assets.
 Valued on balance sheet at what paid for it plus freight-in, receiving costs, and
other costs to get it ready for resale.

a) Example – Nordstrom, Inc.

 As a retailer, Nordstrom acquires finished goods such as clothing from
manufacturers/suppliers and resells them to the public.
 See separate PDF file with Nordstrom Balance sheet and Note 1.
 The company has one line item for its merchandise inventories in the
current assets section of the balance sheet.
 The only other information about inventory in the financials is
contained in Note 1 (Summary of Significant Accounting Policies).
The note indicates the cost flow method used for the inventories (i.e.,
the retail inventory method using weighted-average cost).

2. Manufacturing Company
 Produces goods and sells them to merchandisers.
 Costs incurred in the manufacture of a product are accumulated on the balance
sheet as part of inventory until the product is sold (i.e., matching principle).

a) Raw Materials & Supplies

 Materials that will become part of the product or used to produce the
product

b) Work in Process (WIP)

 Includes all the manufacturing costs of products that are in the process of
being manufactured, but have not yet been completed.
 Components of WIP include direct materials, direct labor, and allocated
manufacturing overhead (i.e., indirect materials, indirect labor and other
indirect manufacturing costs).

c) Finished Goods
 Includes all the manufacturing costs of products that have been completed
and are awaiting sale.
 Components of finished goods include direct materials, direct labor, and
manufacturing overhead (i.e., indirect materials, indirect labor and other
indirect manufacturing costs).

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 Chapter 8 Lecture Notes: Valuation of Inventories
d) Example – Johnson & Johnson
 As a manufacturer, the company has all the three components of inventory
discussed above.
 See separate PDF file with J&J Balance sheet and Note 1.
 On the balance sheet, Johnson & Johnson has one line item for
inventory under current assets. However, there is a separate note that
breaks the inventory down into its three components.
 Note 1 (Summary of Significant Accounting Policies) indicates the
cost flow method used for the inventories (i.e., First-in-First-out basis).

B. Flows
 Note, in the illustration below, all inventory costs are recorded as assets on the
balance sheet (i.e., capitalized) until the inventory is sold.
 The costs are transferred to the income statement (i.e., expensed as cost of goods
sold) when the inventory is sold and revenue is recorded in accordance with the
Matching Principle.

Source: Illustration 8-2 from Kieso, Weygandt and Warfield, Intermediate Accounting 14 th ed., Wiley

C. Calculating Cost of Goods Sold and Ending Inventory

Source: Illustration 8-3 from Kieso, Weygandt and Warfield, Intermediate Accounting 15 th ed., Wiley

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 Chapter 8 Lecture Notes: Valuation of Inventories
 The general formula for calculating cost of goods sold is:
Beginning Balance of Finished Goods (BB FG)
+ Cost of goods manufactured (COGM) or finished goods purchased in the
period
= Cost of Goods Available For Sale (GAFS)
- Ending Balance of Finished Goods (EB FG)
= Cost of Goods Sold (COGS)

 The formula can be rearranged to get ending inventory if you know COGS. Just
switch COGS and EB FG:
Beginning Balance of Finished Goods (BB FG)
+ Cost of goods manufactured (COGM) or finished goods purchased in the
period
= Cost of Goods Available For Sale (GAFS)
- Cost of Goods Sold (COGS)
= Ending Balance of Finished Goods (EB FG)

III.Periodic vs. Perpetual

A. Perpetual vs. Periodic
1. Perpetual Inventory System
 All costs related to the purchase/production of inventory and sales of inventory
are recorded directly to the inventory account as the transactions occur.
 A perpetual record is kept in both units and dollars so that at any one time the
company knows quantity and cost of different types of inventory at any time.
 When revenue is recognized from the sale of inventory, the inventory accounts
are credited for the accumulated costs of that inventory (i.e., subtracted from
assets) and the cost of goods sold account is debited as an expense on the
income statement (i.e., added to expenses).
 The balance in the inventory account at the end of the period represents the
ending inventory balance and no adjusting entries should be needed.
 A physical count is usually taken at the end of the period to ensure the value is
correct.
 Theft, damages, discarded inventory, waste, clerical errors,

2. Periodic Inventory System

 The inventory account is not changed during the period.
 The costs of inventory are recorded in a temporary Purchases account.
 At the end of the period, inventory is physically counted and the count is used to
adjust the inventory account so that the ending balance reflects the physical
count valued at the lower of cost or market.
 Cost of goods sold is determined by adding purchases to the beginning
inventory and then subtracting out the ending inventory.

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 Chapter 8 Lecture Notes: Valuation of Inventories
 An adjusting entry is required to recognize cost of goods sold, close out the
temporary purchases account, and adjust the inventory balance.

Class Exercise 8-1

Shin Company sells one product. Presented below is information for January for Shin
Company.
Jan. 1 Inventory 300 units at $10 each
4 Sale 240 units at $16 each
11 Purchase 450 units at $12 each
13 Sale 360 units at $17.50 each
20 Purchase 480 units at $14 each
27 Sale 300 units at $18 each
Shin uses the FIFO cost flow assumption. All purchases and sales are on account.
Instructions
(a) Assume Shin uses a periodic system. Prepare all necessary journal entries, including
the end-of- month closing entry to record cost of goods sold. A physical count
indicates that the ending inventory for January is 330 units.
(b) Compute gross profit using the periodic system.
(c) Assume Shin uses a perpetual system. Prepare all necessary journal entries.
(d) Compute gross profit using the perpetual system.
Source: E8-9B from Kieso, Weygandt and Warfield, Intermediate Accounting 14 th ed., Wiley

Requirement (a): - PERIODIC -

Jan. 4 Accounts Receivable (240 * $16) 3840

Sales Revenue 3840

Jan. 11 Purchases (450*$12) 5,400

Accounts Payable 5,400

Jan. 13 Accounts Receivable (360 * 17.50) 6,300

Sales Revenue 6,300

Jan. 20 Purchases (480*$14) 6,720

Accounts Payable 6,720

Jan. 27 Accounts Receivable (300*$18) 5,400

Sales Revenue 5,400
In this entry, we
apply the formula Jan. 31 Inventory (EB = $14 * 330 units) 4,620
we discussed: COGS 10,500
Begin Balance +
Purchases – Purchases (5,400 + 6,720) 12,120
Ending Balance
= COGS Inventory (BB = 300* $10 ) 3,000
FIFO => first in first out => 330 units left of $14 -> ending balance = 330*14 = 4620
BB (3000) + P (12,120) – EB (4620) = COGS (10,500)

Requirement (b):
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 Chapter 8 Lecture Notes: Valuation of Inventories

Sales Revenue (3,840 + 6,300 + 5,400) $15,540

Less COGS 10,500
Gross Profit 5,040

Requirement (c): - PERPEPTUAL -

Jan. 4 Accounts Receivable (240*$16) 3,840

Sales Revenue 3,840

COGS (240 *$10) 2,400

Inventory 2,400

Jan. 11 Inventory (450*$12) 5,400

Accounts Payable 5,400

Jan. 13 Accounts Receivable (360 * 17.50) 6,300

Sales Revenue 6,300

COSG [(60*$10)+(300*$12)] 4,200

Inventory 4,200

Jan. 20 Purchases (480*$14) 6,720

Accounts Payable 6,720

Jan. 27 Accounts Receivable 5,400

Sales Revenue 5,400

COGS [(150*$12)+(150*$14)] 3,900

Inventory 3,900

Requirement (d):

Sales Revenue (3,840 + 6,300 + 5,400) $15,540

Less COGS (2,400+4,200+3,900) 10,500
Gross Profit 5,040

IV. Physical Goods Included in Inventory

Inventory purchases and sales should be recorded when legal title passes from the buyer to
the seller. The following items require careful consideration in deciding what to include in
inventory at the end of the period.

A. Goods in Transit
 Goods that have been shipped by the seller, but not yet received by the buyer.
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 Chapter 8 Lecture Notes: Valuation of Inventories
 Recognition of the goods as inventory on the balance sheet depends on whether the
terms are free on board (f.o.b.) shipping point or f.o.b. destination.

1. F.O.B. Shipping Point

 Legal title passes to buyer when seller delivers the goods to the common carrier.
 Included in the buyer's ending inventory.

2. F.O.B. Destination
 Legal title passes when the buyer receives the goods.
 Included in seller’s inventory until actually received by the buyer.

B. Consigned Goods
 When one company (a consignee) sells goods for another company (the consignor)
for some type of fee or commission.
 Still owned by consignor and thus belong in the consignor’s inventory.

C. Special Sales Agreements

 Agreements in which the transfer of legal title is not accompanied by a transfer of
the risks of ownership.
 Represent exceptions to the general rule that inventory is recorded by the company
that has legal title to the merchandise.

1. Sales with Buyback Agreement

 Legal title is transferred by the seller to a third party in exchange for payment.
However, there is an agreement whereby the seller will buy back the inventory
at a specified price over a specific future period.
 Often referred to as parking transactions because the seller is financing its
inventory by essentially parking the inventory on another firm’s balance sheet
temporarily
 While legal title is transferred, risk of ownership is not. Thus, the inventory and
the related liability from the repurchase agreements remain on the seller’s books
and no sale is recorded.

2. Sales with High Rates of Return

 Some industries have allow for and have a lot of returns of the inventory sold
(e.g., textbook resellers, toy manufacturers, etc). Treatment of inventory
depends on the predictability of those returns.

a) Reasonably Predictable
 When returns can be reasonably estimated, the goods should be considered
sold.
 A sales returns and allowances account is set up for estimated returns.

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 Chapter 8 Lecture Notes: Valuation of Inventories
b) Unpredictable
 When returns cannot be reasonably estimated, then the goods are not
considered sold and remain in the seller’s inventory until the amount of
returns is known or estimable.

3. Sales on Installment
 Installment sales are sales in which the product has been delivered to the
customer with an agreement that the customer will pay for it in installments.
 Often legal title is not granted to the buyer until all the payments have been
received.
 The goods are considered sold and thus removed from the seller’s inventory as
long as the percentage of bad debts can be reasonably estimated
Class Exercise 8-2

Dimitri Company, a manufacturer of small tools, provided the following information from its
accounting records for the year ended December 31, 2014.

Inventory at 12/31/14 (based on physical count

of goods in Dimitri’s plant, at cost, on 12/31/14) $1,520,00
0
Accounts payable at 12/31/14 1,200,000
Net sales (sales less sales returns) 8,150,000
Additional information is as follows:
1) Included in the physical count were tools billed to a customer f.o.b. shipping point on
December 31, 2014. These tools had a cost of $31,000 and were billed at $40,000. The
shipment was on Dimitri’s loading dock waiting to be picked up by the common carrier.
2) Goods were in transit from a vendor to Dimitri on December 31, 2014. The invoice cost was
$76,000, and the goods were shipped f.o.b. shipping point on December 29, 2014.
3) Work in process inventory costing $30,000 was sent to an outside processor for plating on
December 30, 2014.
4) Tools returned by customers and held pending inspection in the returned goods area on
December 31, 2014, were not included in the physical count. On January 8, 2015, the tools
costing $32,000 were inspected and returned to inventory. Credit memos totaling $47,000
were issued to the customers on the same date.
5) Tools shipped to a customer f.o.b. destination on December 26, 2014, were in transit at
December 31, 2014, and had a cost of $26,000. Upon notification of receipt by the customer
on January 2, 2015, Dimitri issued a sales invoice for $42,000.
6) Goods, with an invoice cost of $27,000, received from a vendor at 5:00 p.m. on December
31, 2014, were recorded on a receiving report dated January 2, 2015. The goods were not
included in the physical count, but the invoice was included in accounts payable at
December 31, 2014.
7) Goods received from a vendor on December 26, 2014, were included in the physical count.
However, the related $56,000 vendor invoice was not included in accounts payable at
December 31, 2014, because the accounts payable copy of the receiving report was lost.
8) On January 3, 2015, a monthly freight bill in the amount of $8,000 was received. The bill
specifically related to merchandise purchased in December 2014, one-half of which was still
in the inventory at December 31, 2014. The freight charges were not included in either the
inventory or in accounts payable at December 31, 2014.
9) Goods purchased from New Haven Inc. for $25,000 arrived at the dock in the evening of

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 Chapter 8 Lecture Notes: Valuation of Inventories

December 31, 2014 after the inventory count was completed. The goods were purchased
under an agreement whereby New Haven will repurchase the inventory in in 2015.

Instructions:
Using the format shown below, prepare a schedule of adjustments as of December 31, 2014, to the
initial amounts per Dimitri’s accounting records. Show separately the effect, if any, of each of the
eight transactions on the December 31, 2014, amounts. If the transactions would have no effect on
the initial amount shown, enter NONE.

Accounts Net
Inventory Payable Sales
Initial amounts $1,520,00 $1,200,000 $8,150,000
0
Adjustments:
1 0 0 (40,000)
2 76,000 76,000 0
3 30,000 0 0
4 32,000 0 (47,000)
5 26,000 0 0
6 27,000 0 0
7 0 56,000 0
8 4,000 8,000 0
9 0 0 0
Total adjustments 195,000 140,000 (87,000)
Adjusted amounts 1,715,000 1,340,000 8,063,000

Source: P8-2 from Kieso, Weygandt and Warfield, Intermediate Accounting 15 th ed., Wiley – Modified.

V. Purchase Discounts
 As discussed in Chapter 7, companies often grant discounts on credit sales to
customers who pay within a specified time period. In chapter 7, we examined the
treatment of these discounts from the side of the seller. Here we review the buyer’s
treatment of the transaction (i.e., the purchase of materials to be used in production).
 Note that purchase discounts are sometimes recorded as revenue, but it is more
appropriate to treat them as a reduction in the purchase price of materials.

A. Gross Method
 Purchases and accounts payable are recorded at the gross amount and then discounts
are credited to the purchase discounts account when they are taken.
 The purchase discounts account is reported on the income statement as a reduction
of purchases.

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 Chapter 8 Lecture Notes: Valuation of Inventories
B. Net Method
 Purchases and accounts payable are recorded at the net amount.
 Discounts not taken are recorded as a debit to the “purchase discounts lost” account
and are reported as an expense in the “other expense and loss” section of the income
statement.
 Considered to be more appropriate, but used less often than the gross method
because it is a little more complicated.

Class Exercise 8-3

Some of the transactions of William Dubois Company during August are listed below. Dubois uses
the periodic inventory method.

Aug. 10 Purchased merchandise on account, $9,000, terms 2/10, n/30.

Aug. 13 Returned part of the purchase of August 10, $1,200, and received credit on
account.
Aug. 15 Purchased merchandise on account, $12,000, terms 1/10, n/60.
Aug. 25 Purchased merchandise on account, $15,000, terms 2/10, n/30.
Aug. 28 Paid invoice of August 15 in full.

Instructions:
(a) Assuming that purchases are recorded at gross amounts and that discounts are to be
recorded when taken:
(1) Prepare general journal entries to record the transactions.
(2) Describe how the various items would be shown in the financial statements.
(b) Assuming that purchases are recorded at net amounts and that discounts lost are treated as
financial expenses:
(1) Prepare journal entries to enter the transactions.
(2) Prepare the adjusting entry necessary on August 31 if financial statements are to be
prepared at that time.
(3) Describe how the various items would be shown in the financial statements.
(c) Which of the two methods would you prefer and why?

Source: P8-3 from Kieso, Weygandt and Warfield, Intermediate Accounting 12 th ed., Wiley

Requirement (a)(1)

8/10

8/13

8/15
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 Chapter 8 Lecture Notes: Valuation of Inventories

8/25

8/28

Requirement (a)(2):

Requirement (b)(1):

8/10

8/13

8/15

8/25

8/28

Requirement (b)(2):

8/31

Requirement (b)(3):

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 Chapter 8 Lecture Notes: Valuation of Inventories

Requirement (c):

VI. Cost Flow Assumptions

 In valuing its inventory, ARB No. 43 requires a company select the costing method that
most clearly reflects its periodic income.
 The cost flow assumption adopted and the actual physical movement of the inventory do
not have to be consistent. In fact, they are often different.

A. Specific Identification
 Each specific inventory item is identified and its costs are included in inventory on
hand until the item is sold.
 When a specific item is sold, its costs are transferred from inventory into cost of
goods sold.
 Generally used when a company has a small number of distinctive and very costly
items in inventory (e.g., jewelry, fur coats, custom orders, etc.)
 Allows for manipulation of income when a company has duplicate items in
inventory at different costs (often due to inflation) as the company may choose to
record the sale of least expensive or most expensive item.

B. First-In, First-Out (FIFO) – Balance sheet approach

 Assumes the first goods purchased or produced are the first to be sold.
 Inventory values on the balance sheet tend to reflect current costs.
 However, current costs are not matched against current revenues on the income
statement in periods of inflation as the cost of goods sold reflects pre-inflation/earlier
costs.
 Ending inventory and cost of goods sold are the same under both the periodic and
perpetual inventory systems.

C. Last-In, First-Out (LIFO) – Income statement approach

 Assumes the last goods purchased or produced are the first to be sold.
IFRS Note:
 Current costs are matched to current prices as cost of goods sold reflects the cost of
the most recent inventory purchased or produced.
 However, inventory on the balance sheet will be valued at older costs and will tend
to be understated in an inflationary period.
 When the periodic inventory system is used, then ending inventory is priced by using
the total units as a basis for the computation of cost at the end of a period. Exact
dates of purchase/completion are disregarded.
 The calculation of ending inventory and cost of goods sold is different when using
the perpetual inventory system as more attention is paid to actual dates.
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 Chapter 8 Lecture Notes: Valuation of Inventories
D. Average Cost
 Items in ending inventory and cost of goods sold are priced on the basis of the
average cost of all similar goods available for sale during the period.
 A weighted average is used for a periodic inventory system.
 A moving average is used in a perpetual inventory system.

Class Exercise 8-4

Iowa Company is a multiproduct firm. Presented below is information concerning one of

its products, the Hawkeye.
Date Transaction Quantity Price/Cost
1/1 Beginning inventory 1,000 $12
2/4 Purchase 2,000 18
2/20 Sale 2,500 30
4/2 Purchase 3,000 23
11/4 Sale 2,000 33

Compute the cost of ending inventory and the cost of goods sold, assuming Iowa uses:
a) Periodic system, FIFO cost flow. b) Perpetual system, FIFO cost flow.
c) Periodic system, LIFO cost flow. d) Perpetual system, LIFO cost flow.
e) Periodic system, weighted-average. f) Perpetual system, moving-average.
Source: P8-6 from Kieso, Weygandt and Warfield, Intermediate Accounting 12 th ed., Wiley

Requirement (a): Periodic FIFO

Requirement (b): Perpetual FIFO

Beg. Inv Purchased Purchased Running

@12 @ 18 @23 Totals Balance
Beginning Balance

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 Chapter 8 Lecture Notes: Valuation of Inventories
2/4 Purchase
2/20 Sale
4/2 Purchase
11/4 Sale
End Balances

Ending Inventory: COGS:

Requirement (c): Periodic LIFO

Ending Inventory: COGS:

Requirement (d): Perpetual LIFO

Beg. Inv. Purchased Purchased Running
@12 @ 18 @23 Totals Balance
Beginning Balance
2/4 Purchase
2/20 Sale
4/2 Purchase
11/4 Sale
End Balances

Ending Inventory: COGS:

Requirement (e): Periodic weighted-average

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 Chapter 8 Lecture Notes: Valuation of Inventories

Requirement (f): Perpetual moving average

E. Method Comparison
1. Increasing Prices
a) COGS: LIFO > Weighted Average > FIFO
b) Ending Inventory: FIFO >Weighted Average > LIFO
2. Decreasing Prices
a) COGS: FIFO >Weighted Average > LIFO
b) Ending Inventory: LIFO > Weighted Average > FIFO

VII. Special LIFO Issues

A. LIFO Conformity Rule
 The IRS requires if a company uses LIFO for tax purposes, it must also use LIFO for
financial reporting.

B. LIFO Reserve
 The LIFO reserve or the Allowance to Reduce inventory to LIFO, represents the
difference between inventory valued using LIFO and the method used for internal
reporting and is disclosed in the notes.
 Example:

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 Chapter 8 Lecture Notes: Valuation of Inventories
 See note on inventories from the financial statements of Deere &
Company (PDF File).
C. LIFO Layers & LIFO Liquidation
1. LIFO Layers
 Over the years, companies build up “layers” of inventory valued on at different
amounts due to inflation.

Source: Illustration 8-20 from Kieso, Weygandt and Warfield, Intermediate Accounting 15 th ed., Wiley

2. LIFO Liquidation
 When a company’s production of new inventory is stalled or reduced (e.g., due
to supply shortages), but demand increases or remains stable, then a company
must liquidate its inventory on hand.
 When LIFO is used as a costing method, it means that inventory valued on the
books at old costs will be sold and cost of goods sold will reflect old costs. This
effect is known as “LIFO” liquidation and results in artificially high net income
that triggers higher taxes.
 The LIFO method we used above is a specific goods approach or traditional
LIFO approach and can easily lead to LIFO liquidation.

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Source: Illustration 8-21 from Kieso, Weygandt and Warfield, Intermediate Accounting 15 th ed., Wiley

3. Specific Goods Pooled LIFO Approach

 To help reduce LIFO liquidation and to simplify record keeping, many companies
combine inventory items of a similar nature into pools and each pool is treated
as one inventory item for costing.
 LIFO liquidation is less likely to occur because reduction of one inventory item in
the pool may be offset by an increase in another similar item.
 Increases the units of inventory in the pool are valued at the average
purchase/production costs during the year.
 Problems arise when the pools must be redefined due to changes in products
produced and when LIFO liquidation may still occur if a product in shortage is
temporarily replaced by another product that isn’t in the pool.

D. Dollar-Value LIFO
 A pooled method that overcomes weaknesses of the other LIFO approaches because
increases and decreases in the pool are measured in terms of dollar value rather than
the physical quantity of goods.
 Ending inventory in each period is stated at current costs and then is converted to
prices prevailing when LIFO was adopted using a price index. The index for the
first year is 100% or 1.0.

E. Major Advantages and Disadvantages of LIFO Methods

1. Advantages
a) Matching
 More recent costs tend to be matched with revenue as cost since cost of
goods sold consists of the most recent purchase/production costs.

b) Tax Benefits
 Since cost of goods sold is higher, net income is lower and taxes are less as
long as prices continue to rise and inventory levels increase or remain stable.
 Tax law dictates that a company using LIFO for tax purposes must also use
it for financial reporting (the LIFO conformity rule).

c) Less Inventory Write-Downs

 Since inventory on the balance sheet is valued at older costs, there is less
chance inventory will be valued lower than the market price. Thus, it is
unlikely inventory write-downs will be necessary using the lower of cost or
market standard.

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 Chapter 8 Lecture Notes: Valuation of Inventories
2. Major Disadvantages of LIFO
a) Reduced Earnings
 While there is a tax benefit to reduced earnings from the use of LIFO,
investors may view lower earnings as a negative when valuing company
stock.

b) Inventory Understated
 The balance sheet accounts are often used as a tool in valuing a company
and the LIFO method understates inventory value because the inventory is
valued at old costs.

c) Physical Flow
 LIFO does not generally reflect the actual physical flow of inventory where
older inventory is generally sold first.

d) Involuntary Liquidation/Poor Buying Habits

 When the older base layers are liquidated, it can result in very old costs
being matched against current revenues and distort net income.

F. LIFO Versus Other Methods

1. LIFO is generally preferable to FIFO when:
(a) selling prices and revenues have been increasing faster than costs
(b) an industry traditionally uses LIFO (e.g., department stores) or generally
has a fairly constant “base stock” of inventory.
2. LIFO would not be preferable when:
(a) prices tend to lag behind costs,
(b) specific identification is traditional
(c) unit costs tend to decrease as production increases, thereby nullifying the
tax benefit that LIFO might provide.

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