AB114-Discussion 9 – Discussio FIFO

Discussion (FIFO)

FIFO inventory method refers to the system where the oldest stock is used first and the newest stock is sold last. Jason is right to pick FIFO as the costing method because FIFO works with the current market prices and the inventory items purchased earlier are either sold or used for production and with that it also limits the impact of inflation as the oldest items in the inventory are used and it provides more accurate inventory valuation.

The decision by Jason is ethical because the earnings of the net earnings company are likely to increase and so will the contribution of the company to the economy in terms of taxes. The decision is likely to benefit Jason because an increase in gross profit may also see him much more and the goodness with this is that Jason will work harder to make sure that there is more money flowing in so that he can take a bigger share. The disadvantage of basing the compensation of the CEO to the company is that if the company isn’t doing well and the earnings are low the CEO may not find the motivation to work and some may consider jumping ship for greener pastures.

Reference

Powers, J. (1971). The retail inventory method made practical. New York: Controllers Congress, National Retail Merchants Association.