I remember many discussions on this from my college accounting classes. I will give you an example that made sense for me. Say that you own a car dealership - and at the end of the year you have to pay taxes on your inventory of cars that didn't sell. Do you think the IRS will take your average? Would you want to risk paying extra taxes on inventory that should have been FIFO recorded, but you averaged it? It's the end of 2008 so at years end, the car dealers will pay more for a 2007 sitting on their lot than a 2008 that is left over - that is why if you find a 2007 still on somebodies lot they will almost pay you to take it from them.
They would have many more years of inventory to track. Sometimes FIFO or LIFO make good sense like with something perishable you would naturally sell the old merchandise first.
Buy using LIFO you are understating your inventory because it looks like you are selling the higher priced merchandise so have less profit.
Using either method you only have to deal with a price until that merchandise is sold.
Average cost would be hard to compute after a while since you could have some that is decades old that you would need to keep averaging in with the new stuff and each day your cost of sales would be a different percentage. Financial Statement Analysis::
File Format: PDF/Adobe AcrobatMar 7, 2005 Since the investors can make only 13% elsewhere, Invest is doing the right thing . The Firm B. LIFO reports lower inventory than FIFO.
http://www.almaris.com/fact/problems/32-Financial-Statement-Analysis.pdfHOME |
APPENDIX 2 FINANCIAL STATEMENTS The Basic Accounting Statements::
File Format: PDF/Adobe Acrobat - View as HTMLmight be different when doing valuation. Some of these differences can . Three basis approaches to valuing inventory are allowed by GAAP: FIFO, LIFO and
http://www.hss.caltech.edu/courses/2005-06/Spring/bem107/Readings for Course/Damodaran Book/App2.pdfHOME |
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 Financial Representative =Insurance salesman?
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What is the main reason doing FIFO , and LIFO as doing inventory? Why can't they just average the cost? ?