Discuss whether or not you believe that LIFO is a fair inventory valuation method.

Looking to your neighborhood and businesses that you frequent, 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.
martrano
Asked Feb 08, 2013
It's not just an issue of fairness. It depends on what kind of products, how they are used and the business' ability to measure the amount in inventory. A consumer electronics store where each item is bought as a separate unit with a model and serial number can accurately valuate inventory using specific identification. You enter each item into the computer system when it is purchased and deduct it when it is sold.

But what about the following examples?

1) A cement Plant where trucks are constantly dumping raw materials into the facility, the plant mixes them to a number of different formulas then pours the mixture into a delivery truck and sells it by the cubic yard.

2) A restaurant that buys their food from a wholesaler, prepares it and sells it by the meal.

3) An airline that buys jet fuel in bulk and burns it carrying passengers from one location to another.

The bean counters will surely apply some accounting magic to valuate those inventories by LIFO or FIFO but in the real world, businesses add the guess they made at the end of the last period, guess what they have now and adjust what they bought by the difference. I'd call that GIGO. "Guess what came in, and guess what went out." :-)
Rob
Answered Feb 08, 2013
Edited Feb 08, 2013

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