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What is the accounting objective which best relates to the FIFO method? a. Tax Minimization b. Income Smoothing c. Profit Maximization d. Accurate Reporting
Accurate Reporting. please correct me if i am wrong
b-Income smoothing
basic objectiveis Dbut in time of price fluctuations, FIFO can be used to distort profit figures..
According to me it should be periodic matching cost against revenue. Also by doing this closing inventory would be more reflective of the market value on the assumption that the organisation does not carry too much of obsolete inventory.
its Accurate reporting. The inventry should be valued at lower of cost and NRV. And fifo is best to reflect the best net realaizable value. the last inventry left beyand is more truely reflct the market prize. As compare to the first in inventory.
Its can be said that is a loop hole that it can be use for profit maximization ...
Profit Maximization
i think income smoothing
it is not taxmimization and it is not profit maximaization
d. Accurate Reporting.
Its shows were its lagging, its make easy to plan and tackle.
c.Profit Maximization
Under FIFO, the most recently purchased inventory items are included in ending inventory on the balance sheet because the company assumes that every time an item is sold, it sells the oldest item that is in inventory. Hence, the first item that the company buys as inventory is the first item that is sold.
In a period of rising costs (an inflationary situation), use of FIFO will result in a higher inventory balance and a lower COGS (and therefore higher profit) when compared to LIFO (covered next). This is because the newest, most expensive units of inventory are still on hand at year end (higher ending inventory) and the oldest, cheapest units of inventory are what were sold during the year (lower cost of goods sold).
