Inventory Valuation Method

Inventory Valuation Method

FIFO, LIFO and Weighted Average: Which method is most beneficial?

Eunica Babingao

John Carlo Canlas

Andrea Libut

Jonathan Sampang

Yvette Tiatco

Romel Valencia

Holy Angel University

Author Note

Group 5, XRESEARCH Section F-432, Holy Angel University

Correspondence concerning this article should be addressed to Group 5, College of Business of Accountancy, Holy Angel University, Sto. Rosario Street, Angeles City, Philippines.

Table of Contents:

I. Abstract

II. Introduction

• Background of the Study

• Statement of the Problem

• Objectives of the Study

• Significance of the Study

• Scope and Limitations

• Review of the Related Literature and Studies

 Literature

 Related Studies

• Frameworks

The following are more common methods allowed by Generally Accepted Accounting Principles: First-in, first-out (FIFO). The FIFO method of valuing inventory assumes the earliest inventory purchased is the first to be sold. During periods of inflation, the use of FIFO will result in a lower cost of goods sold, higher inventory value and higher net income. Last-in, first-out (LIFO). The LIFO method assumes the latest inventory purchased is the first to be sold. During periods of inflation, the use of LIFO will result in a higher cost of goods sold, lower inventory value and lower net income. Weighted average. Under this method, both inventory and cost of goods sold are based on the average cost of all items bought during a period. Specific cost. Under this method, both inventory and cost of goods sold are based on the actual cost for each item bought during the period. Each of these inventory valuation methods have varying effects on net income, income taxes paid and cash flow”. Firms often adopt the LIFO approach for the tax benefits during periods of high inflation, and studies indicate that firms with the following characteristics are more likely to adopt LIFO - rising prices for raw materials and labor, more variable inventory growth, an

Variances in accounting numbers and accounting ratios of users of LIFO and FIFO methods, which was examined by their financial statements, exposed that choice of LIFO method was more related to tax savings based on the studies of Dopuch and Pincus as cited in Ibarra (2008). Thus, the greater the tax savings potential, the greater the possibility that the firm will adopt LIFO inventory valuation method (Biddle, 1980; Morse & Richardson, 1983).

In small companies, Kuo (1993) concluded that as operations of company increased, as measured of total sales, it is more likely that the company would use LIFO as their method of inventory valuation. But companies have the decision and the decision whether to continue or to switch with different inventory valuation methods (Hunt, 1995)

We compare whether there is difference in the additional predictive variable in our earnings variable, derived under FIFO or LIFO inventory methods, in forecasting operating cash flows (Murdoch, Dehning & Krause, 2013).

Assumed the recent history of rising prices, many firms have converted, or are considering a switch to LIFO from FIFO since this change can result in a higher tax deduction (Cohen & Pekelman, 1986). The study considers the impact of tax liabilities of the ideal inventory policy through the medium of FIFO and LIFO tax valuation schemes in a stochastic environment (Cohen & Pekelman,