Preffered menthod of Inventory Cost Flow because, remember, best, current

suxiaoxiao

I remember having read in Schweser that FIFO(Irrespective of IFRS/GAAP) is the most preferred method of inventory cost flow because
1) Inventory is latest and gives best approximations of current prices


However, i just did 2010 CFA Sample Questions, and i found that Specific Identification is most preferable followed by FIFO under IAS.

Pls help me here !

All the best !
Cheers,

JRossSter

Thanks but the question dint mention anything about company or its products..
What should we go with?

spartanag07

Specific is the preferred method... It assigns a cost to each specific item. However, this is a insane job when you have several lines of inventory * 1000's of items.

For that reason, specific is mostly used by car dealers for cars, or like for special items like one of a kind paintings etc.

Finalnub

Matori Wrote:
-------------------------------------------------------
> Specific is the preferred method... It assigns a
> cost to each specific item. However, this is a
> insane job when you have several lines of
> inventory * 1000's of items.
>
> For that reason, specific is mostly used by car
> dealers for cars, or like for special items like
> one of a kind paintings etc.


exactly, i remember i've read this too.
Dontknow1987 maybe you'r confused by the fact that Lifo is not allowed under ifrs. It doesn't mean fifo is the best or the preferred under ifrs. No matter the system, specific identification will always be the most precised one

Beatnik

I would go with Specific Identification. I also recall reading this somewhere.

studyn

I think schweser put that because even if the specific identification is the best one, it's not that common or realistic for each kind of companies. A company that sell pencils can't apply it for each pencil, so fifo is a kind of default choice.

But in your possible choices, did you have both specific identif and fifo ?

sgupta0827

I think they intended the answer to be the 'ideal' inventory pricing method without considering what the product is.

Obviously for accounting purposes, a company would prefer to price each individual unit, but usually the cost/benefit doesn't work that way, so FIFO is then the second best.

rgonzalez

Isn't the issue also that you want your inventory method to represent pricing realities. So if prices are rising, FIFO gives you the best approximation of the true value of your inventory. Whereas in a falling prices environment, LIFO would be best. Right?

siavosh

Specific ID is preferred in both, if possible.

IFRS prefers using the method that reflects your actual flow in and out of inventory. Hence Specific Id is most accurate. FIFO is preferred after specific id if you sell the inventory you purchase first.

Under GAAP too, you need to use the method most appropriate for your business transactions.