How does one chose among the various inventory methods( Average, LIFO, FIFO). Although no absolute rules can be stated, prefer-ability for LIFO can ordinarily be established in either of the following circumstances:
Often the inventory valuation methods are used in combination with other methods. For example, most companies never use LIFO totally, but rather use it in combination with other inventory valuation approaches. One reason is that certain product lines can be highly susceptible to deflation instead of inflation. In addition, if the level of inventory is unstable, unwanted inventory liquidations may result in certain product lines if LIFO is used. Finally, where inventory turnover in certain product lines is high, the additional recordkeeping and expense are not justified by FIFO. Average cost is often used in such cases because it is easy to compute. It is recommended that the pricing method most suitable to a company be selected and, once selected, be applied consistently thereafter. If conditions indicate that the inventory pricing method in use is unsuitable, serious considerations should be given to all other possibilities before selecting another method. Any change should be clearly explained and its effect disclosed in the financial statements. |