Inventory Costing and Intangible Assets- Accounting Majors only - Please give your opinion to the article with cited work
With FIFO (First In, First Out), the oldest products are the first sold. This appealed to me as the most logical. I picture items being stocked on a grocery store shelf; oldest inventory moved to the front of the shelf, newer arrival product placed in the back. (Of course, those items are often perishable which dictates FIFO use.) But this seemed the best to me....then I read that FIFO is accepted internationally (as opposed to LIFO) so it appeared that the rest of the world thought it made the most sense, too.
After learning about LIFO (Last In, First Out), however, I realized the benefits to income tax reduction seemed brilliant! When price are rising (inflation) the cost of goods sold is higher - resulting in lower taxable income.
LIFO may result in ending inventory "...that is priced well below its replacement cost." (Williams) By the same token... future declines in market have less impact on LIFO because most recent (generally higher cost items) are sold first. Any product acquired at a lower price will coincide with market downturn pricing.
Of course, inventory may be understated because the inventory figure is then based on oldest (often lower) costs in the case of inflation.
LCM (Lower-of-Cost-or-Market) Rule - In this case, inventory on a balance sheet is valued at the lower of either its cost or its market value (current replacement cost). "When the cost equals the market value, no gain or loss is recognized. When the cost is greater than the market value, a loss is recognized." (www.myaccountingcourse.com)
With this information, I turned back to my Module 3 financial statement from CVS Health to see what the financial statement disclosed about their inventory methods:
Inventory Accounting Policy
All inventories are stated at the lower of cost or market. Prescription drug inventories in the RLS and PSS, as well as front store inventories in the RLS stores are accounted for using the weighted average cost method. Physical inventory counts are taken on a regular basis in each retail store and long-term care pharmacy and a continuous cycle count process is the primary procedure used to validate the inventory balances on hand in each distribution center and mail facility to ensure that the amounts reflected in the accompanying consolidated financial statements are properly stated. During the interim period between physical inventory counts, CVS Health accrues for anticipated physical inventory losses on a location-by-location basis based on historical results and current trends.
Source: CVS Health Corp., Annual Report
Very interesting to go back and look for this information!!
https://investors.cvshealth.com/~/media/Files/C/CVS-IR-v3/reports/2015-annual-report.pdf
Williams, J. (2016). Financial & managerial accounting. Place of publication not identified: Mcgraw-Hill Irwin.