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Inventory is costed as if the units most recently added to inventory were the first units sold
Ending inventory is therefore assumed to consist of the oldest units and is measured at the cost of these oldest units In certain industries, LIFO does match economic flow of values since they claim, the profit margin that actually influences business pricing decisions is the margin between sales prices and current costs, not the margin between sales prices and cost levels that existed at the time the inventory was purchased.
o under LIFO, inventory is valued forever in terms of whatever the price level happened to be at the time LIFO was introduced.
o as time goes on and price levels change, the inventory figure under LIFO departs further and further from reality, becoming neither a reflection of actual purchase costs nor of current costs.
Conclusions :
1. Of the techniques discussed, only LIFO is currently in accordance with generally accepted accounting principles. 2. Depreciation on replacement costs may become accepted either as in accordance with accounting principles, as a basis of income taxation, or both.
2. The overall adjustment of all financial statement items to current prices is likely to remain as a supplementary report rather than as a substitute for figures based on historical cost.
References :
ANTHONY, Robert N. Management Accounting (Text and Cases), 1970 www.simplified-accounting.com