Question

FIFO, average-cost, and LIFO methods are often used instead of specific identification for inventory valuation purposes. Compare these methods with the specific identification method, discussing the theoretical propriety of each method in the determination of income and asset valuation.

Short answer

There are different alternatives for determining the cost flow assumption. They are LIFO, FIFO, and Average cost method.

Step-by-step solution

FIFO vs. special identification method

FIFO method values inventory based on the chronological order of acquiring them. Under this method, each item is valued at the earliest historical cost irrespective of its date of acquisition.

Special identification values each inventory at their specific cost. This method is ideal but has several difficulties.

FIFO may be closer to special identification in the sense that it values inventory approximately with their actual cost.

LIFO vs. against special identification method

LIFO is a method of valuing inventory in the opposite direction of acquiring them. Under this method, the latest introduced inventory is issued first.

This method is not compatible with special identification as the value of COGS is computed at a much higher rate than the actual cost of the inventory.

Unlike special identification, LIFO has the drawback of matching the actual cost with actual revenues.

Weighted Average vs. against special identification method

The average method is the valuation of inventories at their mean cost. Like special identification, this method may not be ideal but is the most appropriate method as the unit cost of the inventory includes the cost of acquired inventors.