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There are different inventory costing methods that different organizations normally implement. The differences in results recorded from the four different methods are mainly due to the ever-changing prices of goods bought by the companies. There would exist no differences if the purchasing prices were the same. Due to the constant changing prices, the variation in these methods results in varying amounts of money the company spends on buying the goods and the net income made by the company.
Last in, the first-out (LIFO) inventory costing method accounts for how inventory was sold. In this model, most goods that were recently produced are recorded as sold first. This model is not applicable in several countries, such as Japan and Russia. The U.S is the only known country that follows this method, citing the Generally Accepted Accounting Principles. In LIFO, a company records the goods that were produced recently as the first items sold. This assumption is used for cost accounting purposes if the company does not intend to sell the newest or the oldest inventory.
This business model is mostly used by businesses that sell products whose prices increase annually. With the help of this model, companies are able to relate their revenue to their recent costs. Also, this costing method helps businesses save on taxes that would otherwise have been incurred had other costing methods been used. If LIFO is used during high inflation, it is said to manipulate the figures on the balance sheet. This method has also been linked to offering its users an unfair tax break.
In the first in, first-out method, the oldest inventory products are recorded as sold first. This method is ideal for asset management and valuation since the oldest assets are disposed of or used first. When it comes to tax, FIFO assumes that income statements included in the COGS are those of the oldest costs. The other inventory is then matched to the assets recently produced.
In the case of inflation, using the FIFO method is often associated with a higher net income compared to the LIFO. In addition to that, FIFO is considered the most accurate costing method when it comes to matching the cost flow that is expected to the actual flow of goods. Also, it reduces the obsolescence of inventory and reduces the impact of inflation on the company. Some of the disadvantages linked with FIFO use are that if used during inflation, it may result in a heavier tax burden and the recognition of paper profits.
The weighted average cost method, on the other hand, uses the weighted average of the units of products ready to be sold within a particular accounting period. The value obtained is then used to calculate the ending inventory and also the cost of goods sold. For a company that utilizes the weighted average method and there happens to be a rise in prices, the cost of the goods sold is more than goods obtained through FIFO but less than the cost of goods sold through LIFO. The weighted average takes a middle place between LIFO and FIFO (Hunton, 2017).
These inventory costing methods are mainly involved assumptions of the cost flow through a business. All the costing methods are acceptable; however, different costing methods prove to be efficient under different conditions. For the case of Wild Water Sports Inc, I would recommend the use of the FIFO costing method since it is easy to apply, it has no manipulation of income, and then there is a higher chance of the current balance sheet amount of inventory to match the current market value. However, if this method is adopted, it needs to be used consistently to avoid violating the accounting principle of consistency.
Reference
Hunton, N. (2017). A case study on inventory costing methods. University of Dayton
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