The LIFO method Essay
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As the table above shows, figures for the FIFO method are the same, so in this case, movement across the inventories will have no effect on stock valuation and therefore profit. Changing should only therefore occur if the perpetual system proves to be easier or more efficient. From the discussions above, however, it is apparent that the periodic system is better so the company should not change systems. The difference in valuation using the LIFO method proves to be very different.
However, SSAP 9, does not permit this method as using the latest price shows stock at the inflated value, thus not representing a true and fair view. This should therefore have no effect on the consideration to changing the inventory system.
AVCO method shows valuation is relatively similar for either inventory system. Periodic is slightly lower, which will consequently increase profits slightly; however the difference is not great enough to impact a decision for this reason alone. Consideration of other factors, as discussed previously will prove to be of importance here, when making a decision over which inventory system to choose. To conclude, this report has discussed the importance of the choice in stock valuation method and inventory system and the effects each will have.
Stock valuation will have an effect on the company’s overall profit figures. The choice made should reflect a true and fair view of the company’s status. For this reason, the accounting standards thus should not be used by the company prohibits LIFO method. FIFO and LIFO appear to produce similar and fair valuations therefore either, could be used. Both the periodic and perpetual system allows either stock valuation to be used. The perpetual system is very time consuming, thus costing the company money. Where as the periodic system is not prepared as often (although regular enough to ensure the company is up to date) and therefore costs less time and money.
Such conclusions suggest the periodic inventory system with either a FIFO or AVCO stock valuation method would prove to be the most suitable. Through the discussions in this report it becomes apparent that the most suitable stock valuation method, which abides to accounting standards is FIFO or AVCO. As these can be applied in either inventory system, we suggest the periodic inventory to be chosen, as it is most cost efficient.
The company is already using this technique, so no inventory change is recommended. Depending on which stock valuation method is currently in practise depends on whether a change here applies. If they are using LIFO then they must change in order to comply with accounting standards. Otherwise, no change is needed is either LIFO or AVCO is recommended.
Books: Sangster (1997) 4th Edition Workbook of Accounting Standards, London; Pitman Publishing Wood. F and Sangster. A (2002) 9th Edition Business Accounting 1, , Essex; Pearson Education Limited Wright.