Discuss below in a 200 words:
Q: During a period of inflation (increasing costs of goods), which inventory cost flow method would provide the highest ending inventory balance? How would this affect the net income of the company? Explain why it would, or would not, be ethical to select the cost flow method that reports the highest net income?
During the period of inflation, the carrying value of inventory under FIFO method (first in first out) will be higher because the sold units will be recorded at the oldest prices. Thus, resulting in lower cost of goods sold thereby higher profits and higher income tax whereas the closing stock will be recorded at the recent rates which will be high in the present period which is experiencing inflation. It does happen in many enterprises that people change their method of valuation of inventories, depreciation method but the change is accepted only when the reason for the change is genuine, effects of such changes are adequately disclosed. It's not ethical to select the cost flow method just to report the highest net income as it will be window dressing of the books.