What are some advantages and disadvantages of using the FIFO method of inventory valuation?
FIFO allocates the cost of the first units purchased to the first units sold; consequently, in a period of rising prices, this would produce a higher net income. This may be an advantage for the purpose of financial reporting if reporting a higher profit is desired. However, this is a disadvantage for tax reporting because a higher profit means paying more tax. FIFO also tends to best match physical flow for most products.
More Questions Accounting Chapter 5:
- What is the difference between the flow of costs and the physical flow of goods?
- In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.
- In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.
- What are some advantages and disadvantages of using the FIFO method of inventory valuation?
- What are some advantages and disadvantages of the specific identification method of accounting for inventory?
- What is the effect on the accounting equation of recognizing uncollectable accounts expense?
- What is the net realizable value of receivables?
- What is the difference between accounts receivable and notes receivable?