MEMO TO: Partners of Fan Company A
FROM: Your Name
DATE: Submission Date
SUBJECT: Recommended Inventory Valuation Method
I have calculated the ending inventory for Fan Company A using the four following inventory valuation methods:
Periodic FIFO (First In, First Out)
Periodic Average Cost
Perpetual LIFO (Last In , First Out)
to determine which inventory method to recommend to the management of the Company. A summary of my calculations follows.
Provide an explanation of your calculations for each of the inventory valuation methods.
Finally, your recommendation.
Fully explain how your inventory valuation method impacts the ...view middle of the document...
To management, higher net income is an advantage. It causes external users to view the company more favorably. In addition, management bonuses, if based on net income, will be higher.
Under the LIFO method, the latest (most recent) purchases are considered to be the first goods used or sold. Ending inventory is thus made up of the first (oldest) purchases. When a periodic method is used, the first/ last purchase determination is made only at the end of the year, based upon the actual chronological order of all purchases. When a perpetual method is used, however, the first/ last purchase determination is made continuously throughout the year. When inventory levels get low under the perpetual method, early purchase costs will often be assigned to goods sold, a situation that is much less likely to occur in a periodic system. Therefore, in times of either rising or falling prices, LIFO ending inventory is usually different under a periodic system than under a perpetual system.
The major reason why a company uses LIFO is for the tax benefits. Cost of goods sold is higher under the LIFO method, resulting in lower net income. Therefore, lower taxes are owed and more cash...