Page 44 - Accountancy_F5

at varying rates throughout time, Last in First Out (LIFO) Method
especially when using techniques. The Last-In, First-Out (LIFO) technique
The difficulty in exactly identifying assigns a value to inventory based on the
which units were used or sold initially, presumption that the most recent things
and at what cost, gives rise to this acquired by the shop would be used or
complexity.
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issued first. As a result, the things that
(iii) Understates the current production were received initially will be used up
cost if prices of materials are rising or issued last. This approach values the
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rapidly; The conventional methods for ending inventory at the earliest cost prices
estimating manufacturing costs can be since it is considered to contain the earliest
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misleading when material prices rise purchases. By reporting greater costs of
quickly. They frequently charge set or
out-dated rates that do not account for goods sold and lower profits, this strategy
the rising expenses of today. can offer tax advantages during periods
of price increases, even if it may not be in
(iv) Under certain circumstances, more line with the typical flow of things in most
than one price has to be adopted: To organisations. the most recent prices. This
fulfil a diverse variety of customer procedure follows the normal flow of goods
needs and adapt to changing market
conditions, pricing methods must be many of the organisations.
different. Geospatial pricing adjusts Advantages of LIFO
costs based on regional factors.
Particularly in business-to-business (i) Tax efficiency: During inflationary
contexts, customised agreements are periods, LIFO can lead to lower
achievable with negotiated prices. reported profits and thus lower tax
Employing these strategies helps liabilities. This is because LIFO
businesses respond to shifting market assumes that the most recently
conditions and offer superior customer acquired (typically more expensive)
service. items are sold first, leading to a higher

(v) To use the FIFO method, the entity reported cost of goods sold and lower
must maintain proper records of net income.
issues and receipts of inventory items:
Extensive documentation of inventory (ii) Matching principle: LIFO can better
movements is necessary. It makes align current costs with revenues
sure that the cost of products sold on the statement of profit or loss. It
appropriately accounts for the cost
of the first inventory items that were records the cost of goods sold based on
bought. Financial reporting, inventory the cost of the most recent purchases,
control, and decision-making all which may more accurately reflect the
benefit from keeping correct records. current market conditions.

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