Financial Accounting and Reporting - Business Environmental Concepts

The primary basis of accounting for inventories is cost in accordance with the cost principle. The major objective of accounting for inventories is the proper determination of net income in accordance with the matching principle. Actual physical flow may be impractical because many items are indistinguishable from one another and management may be able to manipu¬late net income through specific identification of items sold.

FIFO and LIFO are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption.

You are currently preparing a detailed analysis of the financial statements and accounting records of two companies in the same industry: Company A and Company B. Price levels have been rising steadily for several years. In the course of your investigation, you observe that the inventory value shown on the Company A balance sheet is quite close to the current replacement cost of the merchandise on hand; however, for Company B, the carrying value of the inventory is far below the current replacement cost.

Conduct a preliminary search of the two most common cost follow assumptions (FIFO and LIF) and discuss the following questions:

1. Based on your research, please discuss how FIFO is used to determine the value of ending inventor and cost of goods sold.
2. Based on your research, please discuss how LIFO is used to determine the value of ending inventor and cost of goods sold.
3. Based on your research, what method of inventory valuation is probably used by Company A? Please discuss your reasons.
4. Based on your research, what method of inventory valuation is probably used by Company B? Please discuss your reasons.
5. Assuming that the 2 companies are identical (except for the inventory valuation method used) which company has probably been reporting a higher net income in recent years? Please discuss your reasons.

In your own words, post a substantive response to the Discussion Board question(s) and comment on other postings. Your response should address the DB question(s) and move the conversation forward. You will be graded on the quality of your postings, including mastery of the concept as well as critical thinking. If asked for your opinion, do not simply state that it is a good or bad idea; elaborate on your reasons and argument. Include enough detail to substantiate your thinking as well as your position on the questions or comments.