Question

Discussion #6 - Inventory Methods (due Thurs/Sun) 1010 unread replies.1010 replies. The following is an excerpt from a conversation between Paula Marlo, the warehouse manager for Musick Foods Wholesale Co., and its accountant, Mike Hayes. Musick Foods operates a large regional warehouse that supplies produce and other grocery products to grocery stores in smaller communities. Paula: Mike, can you explain what's going on here with these monthly statements? Mike: Sure, Paula. How can I help you? Paula: I don't understand this last-in, first-out inventory procedure. It just doesn't make sense. Mike: Well, what it means is that we assume that the last goods we receive are the first ones sold. So the inventory consists of the items we purchased first. Paula: Yes, but that's my problem. It doesn't work that way! We always distribute the oldest produce first. Some of that produce is perishable! We can't keep any of it very long or it'll spoil. Mike: Paula, you don't understand. We only assume that the products we distribute are the last ones received. We don't actually have to distribute the goods in this way. Paula: I always thought that accounting was supposed to show what really happened. It all sounds like "make believe" to me! Why not report what really happens?

Answer 1

Answer:

Musick Foods Wholesale Co. is permitted by the US GAAP to use the LIFO (Last In, First Out) inventory valuation method.  The use of LIFO offers Musick and other firms the opportunity to save on taxes as well as better match their revenue to their latest costs when prices are rising.

Explanation:

Using LIFO method of measuring the value of inventory, the costs of the most recent products purchased (or produced) by Musick Foods are the first to be expensed.  It is not that in practice, those costs expensed refer to the units being sold first, it is merely an assumption permitted by the US FASB under her generally accepted accounting principles (GAAP).