Raw material costs have been rising and much of the inventory has been in-house for several months. Which of the following inventory accounting methods would maximize reported company assets?
In a period of rising raw material costs, the First In, First Out (FIFO) inventory accounting method would maximize reported company assets. FIFO assumes that the oldest inventory items are sold first, which means the cost of goods sold (COGS) is based on the older, lower costs of raw materials. Consequently, the remaining inventory on the balance sheet is valued at the more recent, higher costs, thus reflecting higher asset values. Last In, First Out (LIFO) would do the opposite, and Activity-based cost and Moving average cost do not specifically take advantage of rising prices in this manner.References: Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). "Cost Accounting: A Managerial Emphasis."
Contribute your Thoughts:
Chosen Answer:
This is a voting comment (?). You can switch to a simple comment. It is better to Upvote an existing comment if you don't have anything to add.
Submit