LIFO: The Good and The Bad
In the field of accounting, there are multiple methods that a company can use to measure its inventory. The most commonly used methods are: Perpetual, Periodic, First in First Out (FIFO), and Last In First Out (LIFO). This paper will be focus mainly on the LIFO inventory method. It will cover what is a LIFO, why do company likes to use LIFO, and why LIFO is not permissible under the International Financial Reporting Standards (IFRS).
Before going into detail as for why LIFO inventory method is an attractive option for businesses to count their inventory, let's first understand what is LIFO inventory method. When a business sell products from its inventory, the materials that are contained in the storage are a mixture of new and old. It is costly to keep track of each and every materials that is used and sold, so companies develop different methods to keep track of their inventories. LIFO, which stands for Last In First Out, is a method where a business sells its most recent purchased materials first, then sell the older materials. Anyone who studied economic understand that the market has a general trend of inflating a price of goods. Since that assuming a consumer used a certain type of goods, there are less available for the rest of the market. Unless a substitute that has lower cost is developed or discovered, most goods in the market falls under that trend. Basing on the theory that market price is always inflating, one might ask why would a company ever want to use LIFO inventory method. Since if a company is selling those goods purchased with a higher price; would it not, in term, increase the cost of goods sold? Thus, in terms of higher cost of goods sold, isn't it true that less revenue are generated from the product sold?
Like the last two question asked in the previous paragraph, one may ask why would a company ever accept those conditions when they knew less revenues are generated under LIFO. From a...