Suggesting method to management
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2 - Consider the LIFO and FIFO inventory accounting methods. If the business was in a period of increasing costs for its inventory which method would you recommend to management and why? Would your recommendation be different if the company were privately owned or publicly traded? When answering this question do not confuse the accounting under FIFO and LIFO with the actual physical movement of the inventory. This is an accounting convention and not an inventory management technique or program. Think through what impact would result from your decision and whether it is different for public or private companies.
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Solution Summary
In accounting, LIFO and FIFO mean two different ways of setting a value on your existing inventory and calculating your profit. Some retailers stock an individual type of item only once and then when it has sold out, they no longer carry it - so they pay the same price for each unit of that particular item, and have no decision to make when valuing their inventory. Most retailers, however, stock a particular item for some time, replenishing their supply as they run low. The price on the item fluctuates with time, usually going up, alas. So the newest items you purchase may cost more (or less) than the ones you have had for a while.
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In a period of rising costs and constant or growing inventories, LIFO yields lower net income. When lower income is reported to the tax authorities, lower taxes ...
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