Answer to Question #245036 in Management for Madhu

Question

I. “Valuing inventories in an inflationary situation, First In First Out (FIFO) method produces more favourable performance than to a company that applies Weighted Average Cost (WAC) method.” Do you agree? Comment. (Brief note)

2. Identify the reasons for lower net realizable value and explain why inventory should be measured at the lower of cost and net realizable value.

Answer 1

1. The benefits and drawbacks of FIFO The FIFO technique has four primary advantages: it is simple to use, the anticipated cost flow conforms to the regular physical flow of goods, (3) no revenue manipulation is feasible, and the inventory balance sheet amount is likely to approach the present market.
2. Obsolescence, oversupply, flaws, significant price drops, and other issues can all add to uncertainty about inventory item "realization" (conversion to cash). As a result, accountants evaluate inventory using the lower of cost or net realizable value.