Qrb 501 Inventory Systems Lifo

Description of Inventory System

Last In First Out (LIFO) is an inventory valuation method aimed at simplifying tracking cost of goods sold while maximizing tax benefits for companies (“LIFO“, 2008). LIFO inventory makes the assumption that the last goods purchased are the first goods sold. For example, if a company purchases 100 widgets on Jan. 1 for $1 each and 100 widgets on Jan. 2 for $2 each and then sells 100 widgets on Jan. 3, under the LIFO system the “last in” inventory would be the Jan. 2 purchase. So they would book the cost of goods sold at $200 (100 units x $2) resulting in a lower inventory balance. For companies carrying large inventories, tracking the individual cost of nuts and bolts may not be practical or necessary. Companies like Walmart and Target carry thousands of different items and tracking each individually for reporting purposes would be a challenge (“LIFO“, 2008). The aim of Generally Accepted Accounting Principles (GAAP) is to provide financial information only when the benefits of reporting outweigh the costs of obtaining such information (“LIFO“, 2008).

In the case of a car dealership, the parts department may find that the cost of tracking individual parts exceeds the benefit of doing do. The cost of nuts, bolts, screws, bulk oil, and other inventory items fluctuate on a monthly basis and attempting to track value on each unit could be cost prohibitive. By using the LIFO method, cost of goods sold are calculated at the rate of the last order of goods received. During times in which prices are rising, this translates into lower reported inventory balances and reflects a higher costs of goods sold, which results in a lower taxable gross income (“LIFO“, 2008). The Internal Revenue Service (IRS) allows this reporting for inventory items and cost of goods calculations.

Inventory purchase Q2 2011 $24,154.48

Inventory purchase Q3 2011 $19,746.24

Inventory purchase Q4 2011 $29,017.33

Units Sold Q3 2011 / FIFO ($68,228.57)...