Cost Flow vs. Physical Flow of Inventory

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You are an accountant. One of your clients, Jack, owns Jack’s Frozen Foods. He sells frozen food products to small restaurants. Jack contacts you and says he doesn’t understand the last in, first out (LIFO) inventory procedure you are showing in his inventory records. He always sells the oldest food products first because food is perishable. This flow would be first in, first out (FIFO), so why are you using LIFO for his inventory costing? You tell Jack it is acceptable and not a problem. Jack still does not understand. He says he thought accounting was supposed to give an accurate picture of what really happens.

Accountants often write letters and emails to their clients explaining accounting concepts. As your first post, assume the role of the accountant and compose an email to Jack explaining the difference between physically moving the items and costing the inventory. Address these topics:

  • Are your techniques for costing inventory and Jack’s method of physically moving the inventory GAAP compliant?
  • Why are you using LIFO costing?
  • How would the different costing methods affect Jack’s income statement and balance sheet?
  • Can you change from FIFO to LIFO each quarter? Support with a GAAP principle.
  • How does inflation impact the situation?
  • GAAP vs. IFRS

only need this questions answered, this is a discussion post. only about a paragraph is needed.

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