Answer to Question #304470 in Accounting for Joel

Question

You have been hired as an account for the OPQ Distribution Company. The company sells medical supply products to hospitals and doctor offices used for a resale or merchandising operation. The types of medical products sold are gloves, thermometers, and wheelchairs. OPQ Distribution Company has hired you because there have been financial issues with accounting for the inventory and expensing the inventory. The company wants you to resolve the inventory problems by selecting the best inventory valuation method to ensure that the company can operate successfully and meet their customers´ needs.

• Propose the inventory valuation method you would advise the company to use.
• Explain why you think it is the best suited for the business.
• Explain the cost of goods sold, ending inventory, and how the inventory valuation method you have chosen may impact these two factors.

Answer 1

Propose the inventory valuation method you would advise the company to use.

In my opinion, the most appropriate method is FIFO.

Explain why you think it is the best suited for the business.

1. With this method, expired latex gloves never run the risk of being thrown away or wasted. Thermometers and wheelchairs do not expire. But it would always be possible to produce new, more productive and better models and types of products that would further devalue the items sold.

2. Due to globalization processes, the FIFO method is more valuable and widely used in the world, while LIFO is not even recognized internationally and is almost never used.

3. The method we have chosen is based on the natural flow of stocks. Because of this, there is a much lower risk of making a mistake.

Explain why you think it is the best suited for the business.

The cost of goods sold directly depends on the chosen method of inventory valuation. In fact, according to the FIFO method we have chosen, the oldest units with the lower cost are sold first, leading to a lower cost price and higher profits.

 From this we can conclude that the higher the profit, the more taxes are paid, which is one of

disadvantages of using this method to the detriment of the LIFO method.

Thus, even the final stock has a much higher value, because the goods accounted for are the last receipts, which have a higher value than the old ones.