Page 43 - Accountancy_F5
P. 43
Advantages of FIFO use of electronic reporting systems
(i) Easy to understand and use: This to minimise manual editing, are very
simplicity makes FIFO easy to use important. Also the enforcement of
in managing inventory, money, and strict penalties for non-compliance
organising data. With FIFO, you with regulations, the protection of
just use or sell the oldest things first whistleblowers to promote reporting,
FOR ONLINE READING ONLY
without needing to do any complicated the requirement for the public
calculations. It also fits well with disclosure of financial statements to
accounting rules and stops from enhance transparency, the promotion
keeping old stuff that will not sell. of education and awareness regarding
LANGUAGE EDITING
(ii) Consistent with the normal procedure ethical financial practices, and the
of issuing the items that were received use of technology solutions like
first: Minimises the possibility of blockchain for transparent and
favouritism or disagreements by unchangeable record-keeping are all
ensuring that items are allocated necessary to achieve this.
according to the principle of first- (v) No ambiguity on the values to be
come, first-served. It is a simple included in the cost of goods sold:
method that supports accountability Establishing specific criteria that
and consistency while managing specify which costs are to be included
resources or inventory. in the cost of items supplied is crucial.
(iii) Value of closing inventory will be Disadvantages of FIFO
close to the market price: In order (i) Overstates profits, especially during
for closing inventory to accurately inflation, which may attract heavy tax
reflect the firm’s financial situation, charges: Businesses may face severe
it is often priced near market pricing. tax penalties and legal ramifications
On the contrary, variations can be the for inflating their profits, especially
consequence of different inventory during periods of inflation. In order
valuation procedures or market to mitigate these risks, businesses
fluctuations. Adjustments might be should place a high priority on specific
necessary to provide a correct financial financial reporting and refer a tax
reporting. management professional to ensure
compliance and integrity.
(iv) Makes manipulation of reported
income difficult: The implementation (ii) Does not work effectively if many units
of accounting procedures that conform are purchased during the period at
to established norms, the establishment different rates: It can be difficult to
of robust internal controls with job manage costs and do profitability
separation and regular audits, and the analyses when many units are bought
Student’s Book Form Five
30
23/06/2024 17:34
ACCOUNTANCY_DUMMY_23 JUNE.indd 30 23/06/2024 17:34
ACCOUNTANCY_DUMMY_23 JUNE.indd 30
