how accounting for inventory is related to your future career. For example, if you plan to open and manage a small boutique discuss how you should account for the inventory in the store. As part of that discussion, discuss what method of inventory valuation (FIFO, LIFO, etc) would be most appropriate based on your example. How would you use this inventory valuation information to make financial decisions for your company?

Accounting for inventory

I’m planning to open a grocery store in future. Therefore, I will use FIFO as an inventory method to value my stock. FIFO (First in, First Out) works on the bases that the goods that are sold first were the first to be stocked. FIFO will be a suitable method for my grocery because it will ensure that the old milk is sold first to prevent spoilage (Horngren, 2009). I will be storing milk regularly on the shelves. As the customers buy the milk, I will push the oldest product to the front of the fridge and replace the newer milk behind the cartons and at the bottom shelves of the refrigerator. Therefore, the milk with the nearest expiry date will be sold first, and the ones with an older expiration date sold later. I will limit milk spoilage by using this process and save myself from making losses due to spoilage.

FIFO increases the net income and gives a higher ending inventory on the balance sheet. The value of an old good is used to value the cost of goods sold. FIFO also records higher profits and a lower recorded cost per unit.  Selling old milk first can result in profits (Horngren, 2009). The FIFO inventory method will help me to accurately determine the actual cost of the milk better than other methods of inventory. However, the High net value that is recorded by FIFO may mean that my business will have to pay higher taxes. FIFO records high levels of pre-tax earnings, and I may be forced to pay higher taxes. FIFO is an easy method to apply, and it is not possible to manipulate the income. The flow of costs is directly proportional to the flow of physical goods. Only the old cost is recorded on FIFO, and therefore I can use the new cost to make a profit.

References

Horngren, C. T. (2009). Cost accounting: A managerial emphasis, 13/e. Pearson Education India.