2.1.2 Why Do businesses adopt FIFO?

[Chavi]

What do you guys think of this:

FIFO (first in first out) provides management with a higher level of control over their stock. Also, it instills a cross-checking mechanism where physical stocktakes can be used to verify the accuracy of the stock records.

How many marks have i lost here :S

What does fifo have to do with cross check mechanisms.. aren't u referring to the balance in the stock card vs physical stocktake?

[Stormer]

What do you guys think of this:

FIFO (first in first out) provides management with a higher level of control over their stock. Also, it instills a cross-checking mechanism where physical stocktakes can be used to verify the accuracy of the stock records.

How many marks have i lost here :S

2, most likely.

Just wondering, what answer did you have?

[ks04]

I said that FIFO allow for an easy, cheap, consistant method of tracking stock and recording stock value without going to the expense of setting up a barcoding system to identify the actual cost price of each peice of stock... *shrug*

[Akirus]

FIFO is basically used where it is impossible or impractical to use an identified cost system. Applying the assumption that stock first in is the first out, despite the fact that this may not necessarily be the case, allows a perpetual system to be implemented, or at least with less expenses/etc involved.

I wrote more than that, but something along those lines.

[Chavi]

I said that FIFO allow for an easy, cheap, consistant method of tracking stock and recording stock value without going to the expense of setting up a barcoding system to identify the actual cost price of each peice of stock... *shrug*

yep, said similar. I don't even think there was any need to define fifo

[Fyrefly]

There are only two methods of stock valuation allowed for interchangeable goods in Australia.
One is FIFO, the other is weighted average cost.
So I guess one reason that it's used is because there really isn't a whole lot of choice.
Since you guys haven't studied weighted average cost method, it is difficult to suggest reasons why FIFO would be preferred.
...I dunno... have you guys studied LIFO maybe?? (you can't use it in Australia... only in the US)

Specific identification method (the 'each individual item has its own unique barcode' method of tracking inventory) is only used for inventory that is not interchangeable - that is, stock that is, by nature, individually priced, eg. diamonds, antiques, second-hand cars.

In real-life, FIFO is used because it restricts a business' ability to manipulate its profit figures or overstate expenses (increase in expenses = decrease in profit = less income tax payable to ATO). For instance, in times of rising prices (inflation), if you sell your oldest stock first, but you pretend that it's the new stock that's gone first... your inventory is going to be understated, your expenses overstated, and your profit understated. So the use of FIFO is supported by faithful representation reliability when considering this perspective.

Additionally, during times of inflation (which is almost always), not only are you going to be paying more for your inventory, but you are likely to be *charging* more for it as well. So, it is more consistent if you are to sell the cheaper stock when you charge cheaper prices, and sell the more expensive stock (and face an increase in COGS) as you begin to charge higher prices. It keeps expenses and revenues more aligned, which is better for both relevance and consistency when you look at it from this angle.

It's also easier to apply than weighted average cost (less calculations), and (though accountants don't care about this) usually emulates real-life because most businesses sell older stock first before they put their new stock on the shelves. This is called 'stock rotation' - think about supermarkets... they want to sell the food with the closer use-by first in order to reduce wastage ('stock loss').

Anywayz... it's kind of hard to guess what vcaa is wanting from you guys... perhaps if you dropped words like 'cheaper', 'more simple', and/or 'reflects real life' you'll pick up the marks. I dunno... vcaa is full of morons... I have no idea what angle they're going for on this.


Edit: Sorry... I have trouble remembering all the VCE terminology... I think I used VCE words for everything else.

[_avO]

There are only two methods of stock valuation allowed for interchangeable goods in Australia.
One is FIFO, the other is weighted average cost.
So I guess one reason that it's used is because there really isn't a whole lot of choice.
Since you guys haven't studied weighted average cost method, it is difficult to suggest reasons why FIFO would be preferred.
...I dunno... have you guys studied LIFO maybe?? (you can't use it in Australia... only in the US)

Specific identification method (the 'each individual item has its own unique barcode' method of tracking inventory) is only used for inventory that is not interchangeable - that is, stock that is, by nature, individually priced, eg. diamonds, antiques, second-hand cars.

In real-life, FIFO is used because it restricts a business' ability to manipulate its profit figures or overstate expenses (increase in expenses = decrease in profit = less income tax payable to ATO). For instance, in times of rising prices (inflation), if you sell your oldest stock first, but you pretend that it's the new stock that's gone first... your inventory is going to be understated, your expenses overstated, and your profit understated. So the use of FIFO is supported by faithful representation reliability when considering this perspective.

Additionally, during times of inflation (which is almost always), not only are you going to be paying more for your inventory, but you are likely to be *charging* more for it as well. So, it is more consistent if you are to sell the cheaper stock when you charge cheaper prices, and sell the more expensive stock (and face an increase in COGS) as you begin to charge higher prices. It keeps expenses and revenues more aligned, which is better for both relevance and consistency when you look at it from this angle.

It's also easier to apply than weighted average cost (less calculations), and (though accountants don't care about this) usually emulates real-life because most businesses sell older stock first before they put their new stock on the shelves. This is called 'stock rotation' - think about supermarkets... they want to sell the food with the closer use-by first in order to reduce wastage ('stock loss').

Anywayz... it's kind of hard to guess what vcaa is wanting from you guys... perhaps if you dropped words like 'cheaper', 'more simple', and/or 'reflects real life' you'll pick up the marks. I dunno... vcaa is full of morons... I have no idea what angle they're going for on this.


Edit: Sorry... I have trouble remembering all the VCE terminology... I think I used VCE words for everything else.

I wrote something like that (the bolded section) where you take into account inflation hence FIFO being applied will create the largest profit margin for any given period. How many marks will I get (if any)?