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Discussing Inventory Cost Flow Methods

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Question #1 - If you had the choice of selecting between any of the Inventory Cost Flow Methods in either a perpetual or a periodic inventory system which would you chose for the company you are working for (assuming that the company has inventories)? Please justify the reasons and circumstances for your choice. For example, is your company experiencing rising prices or falling prices in general when they are purchasing new products for resale?

Question #2 - Should a company ever switch from FIFO to LIFO or from LIFO to FIFO? Why or why not? When might it make sense to switch? Has your company ever done so that you are aware of?

Question #3 - When I was an Internal Auditor with John Deere & Company years ago an associate of mine was assigned to go to John Deere's branch in Johannesburg, South Africa to help the controller there try to estimate the ending inventories after a fire.

Please select one of the methods to estimate ending inventories that you would recommend to the controller to use and give your reasons why you are recommending it. You also may give any assumptions that you feel you should such as what information would be required for the method that you have selected. You may also give any limitations on the method that you have selected.

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Inventory Cost Flow Methods

Question #1
In a perpetual inventory system, companies keep detailed records of the cost of each inventory purchase and sale. The records continuously, perpetually, show the inventory that should be on hand for every item. In a periodic inventory system, companies do not keep detailed inventory records of the goods on hand throughout the period. Instead, they determine the cost of goods sold only at the end of the accounting period, that is, periodically. At that point, the company takes a physical inventory count to determine the cost of goods on hand.

To determine the cost of goods on hand at the beginning of the accounting period, the following steps are necessary:
1. Determine the cost of goods on hand at the beginning of the accounting period.
2. Add to it the cost of goods purchased.
3. Subtract the cost of goods on hand at the end of the accounting period.

No matter whether they are using a periodic or perpetual inventory system, all companies need to determine inventory quantities at the end of the accounting period. When using a perpetual system, companies take a physical inventory for two purposes: the first purpose is to check the accuracy of their perpetual inventory record, and the second is to determine the amount of inventory lost due to wasted raw materials, shoplifting, or employee theft.

Companies using a periodic inventory system must take a physical inventory for two different ...

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