Question

33. What dictates the reason why an accountant would choose one of the three inventory accounting methods (FIFO, LIFO, or Weighted Average)?

Answer 1

Use of a particular method of inventory valuation have a bearing on cost of goods sold, gross profit , tax expense and ultimately net income.

Generally in a market of rising prices use of FIFO will give higher value of inventory and LIFO will give lower value of inventory.

As already stated Inentory valuation directly affects cost of goods sold and ultimately operating profit on which tax is imposed. Accountants and management choose a method which saves there cash in terms of tax expense.