The Pros And Cons Of Inventory Accounting Methods

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The choice of inventory accounting methods, specifically for the case of FIFO and LIFO, has developed into a decision, which includes varying consequences and comes with specific implications and benefits, such as communicating private information with FIFO (Hughes, and Schwartz, 1988, p.42) or tax benefits for the choice of LIFO (Morse and Richardson, 1983, p.125). Every firm and manager has to face the decision of which accounting method to choose, and has to include several aspects into their decision making process and weigh the pros and cons in general.
However, the empirical evidence (Frankel and Hsu, 2015, p.48) shows some controversies as to what inventory accounting methods firms decided to use in the past, even though the theory would
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Throughout the years, several different methods have been developed, which are dependent on the respective regulations of countries and institutions, such as the Internal Revenue Service (IRS). The most common inventory methods include FIFO (first-in, last-out), LIFO (last- in, first-out), HIFO (highest-in, first-out), FEFO (first-expired, first-out), as well as the average costing method (AVCO). Each of them has their specific advantages and disadvantages, and comes with certain restrictions and regulations (Lee and Hsieh, 1983, p.7). This paper is going to take a look at the choice of inventory accounting methods of FIFO and LIFO, and is therefore not going to consider the other inventory accounting methods, as that goes beyond the topic of this…show more content…
Due to their different historical development of the respective governmental institutions (Fields, Lys and Vincent, 2001, p.263), there are discrepancies in regulations and acceptance of inventory accounting methods, specifically for the case of LIFO. Since those differences go beyond the scope of this paper, as well as for simplicity reasons, it is henceforward going to generalize their differences and mainly consider the regulations of
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