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Inventory Valuation Methods and Ethical Considerations

Activity Instructions

Net income results, reported in the financial statement presentation, can be affected by the inventory reporting methods used. FIFO, LIFO, and weighted average methods each have their own implications during periods of inflation and deflation. Assume the role of a manager, employee, or an investor, and in 1–2 pages analyze the GAAP and ethical implications of each reporting method in a hypothetical company. Then, given your role, select which reporting method you would use, and explain why. Consider tax liabilities and profit levels in your response, as well as ethical considerations you may have for your valuation method selection.

Submission Requirements

• Written communication: It should be free of errors that detract from the overall message.
• APA formatting: Resources and citations are formatted according to APA (6th edition) style and formatting.
• Length of paper: 1–2 pages, not including cover page and references.
• Font and font size: Times New Roman, 12-point.

Refer to the scoring guide for this assignment to ensure that you meet all of the grading criteria before submitting your document for instructor feedback and evaluation.

Inventory Valuation and Cost of Goods Sold

For this discussion, assume that you are the chief financial officer for your organization and that you are preparing the organization’s financial statement footnotes. As you prepare and gather corporate information supporting the financial practices, policies, and procedures in your company, you consider the importance of the following six questions. Choose three of the following six questions, and describe what type of information would be included in the footnotes to the financial statements, how that information would be stated, and the significance of that information to the user of the financial statement:

• What are the acceptable inventory valuation methods under U.S. GAAP? How does each affect the valuation of inventory and cost of goods sold?
• Explain the accounting principle of lower of cost or market and how it relates to the income statement.
• What do the ratios inventory turnover and days to sell inventory indicate to the financial statement users?
• Can an organization change its selected inventory method, and, if so, is there an effect on current net income or retained earnings? Why or why not?
• Compare and contrast depreciation, amortization, and depletion, giving an example of each.
• How does net book value on fixed assets differ from fair market value of fixed assets, and how do they relate to liquidation?