ACC205.W3D1 - The controller of Sagehen Enterprises...

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The controller of Sagehen Enterprises believes that the company should switch from the LIFO method to the FIFO method. The controller’s bonus is based on the next income. It is the controller’s belief that the switch in inventory methods would increase the net income of the company. What are the differences between the LIFO and FIFO methods? “The cost flow assumption is used to describe the flow of the cost of goods through the accounting system” (p. 5.3). Two types of cash flow assumptions are FIFO and LIFO. FIFO stands for first in, first out. Meaning the older inventory would be sold before the newer inventory. For example, if a store orders more of a certain food product but still has some older left, they will sell the older inventory first. As Wainwright (2012) explains, “With FIFO, the layers of inventory assumed to be sold are based on the chronological order in which they were purchased” (p. 5.3). If a company has inventory that has expiration dates this method would be beneficial.

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