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Inventory Valuation Methods Compared

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Compare and contrast two of the following inventory valuation methods: first in-first out (FIFO), last in-first out (LIFO), or weighted average. Explain the benefits of each inventory valuation method you selected and how the inventory is valued.

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Inventory Costing Methods

A company can keep track of its inventory in two ways, perpetual and periodic. 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 ...

Solution Summary

This solution is comprised of a comparison of three methods of inventory valuation to determine the ending inventory and cost of goods sold using FIFO, LIFO, and average-cost with analysis. The detail step-by-step explanation of how the inventory is valued as well as the benefits of each method provides students with a clear understanding of the concepts.

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FIFO and LIFO review

- Discuss whether or not you believe that LIFO is a fair inventory valuation method.
- Identify three different businesses and then state whether they would benefit most from the FIFO, LIFO or Weighted Average approach to accounting for their inventories. State a reason with your answer.
- Discuss what procedures a company may take to reduce the chance of fraudulent employee activities.
- If you became aware of fraudulent accounting activities in the company where you are employed, discuss what you would do about it, if anything, and state why or why not.

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