Case Study On Ford Corporation’s Inventory Valuation Method

Inventory is stated at the lower of the cost or the market value. The U.S. subsidiary uses the last-in, first-out (LIFO) principle while the value of the rest of the inventory is estimated using the first-in, first-out basis (FIFO). The total inventory under FIFO was found to be $ 8,844 million. The LIFO valuation was $7,866 which was ($978) lower. FIFO method assumes that the inventory units that were first to get to the stores are the ones that will be sold first. The implication is that the old stocks move fast. On the other hand, the LIFO method assumes that the last inventory that entered the store is the first one to be released.
The implication is that; FIFO inventories will be valued using the latest costs of production while LIFO will be valued with the oldest costs. In most scenarios, the costs of production rise due to factors such as inflations and the easing costs of labor. Thus, the FIFO valued inventory will in most cases have a higher value as compared to LIFO
Another factor that can account for the differences in the valuation is the fact that, if new inventory is sold ahead of the first one, there are chances that some of the inventories will become obsolete. The accounting standard requires that the obsolete inventory be written off.
Thus, FIFO produces the best valuation for the ending inventories on the balance sheet. The valuation also tends to increase the income because the value of inventory value, which is the cost of goods sold assume the lowest value. LIFO, on the other hand, is not a good representation of the value of the ending inventory. The valuation assumes the latest costs which are usually higher thus reducing the income.