Advanced English Dialogue for Business – Last in first out

Listen to a Business English Dialogue About Last in first out

Roy: Hey Naomi, have you heard of the “last in, first out” method?

Naomi: Yes, it’s an inventory valuation method. The last items added to inventory are the first to be sold or used.

Roy: That’s right. It’s commonly used in industries where products have a short shelf life or are perishable.

Naomi: How does the “last in, first out” method affect financial statements?

Roy: Well, using this method, the cost of goods sold reflects the most recent costs incurred, which can result in higher expenses and lower reported profits during periods of rising prices.

Naomi: Are there any advantages to using the “last in, first out” method?

Roy: Yes, it can result in lower taxable income during periods of inflation, as higher costs are matched with higher revenues, reducing taxable profits.

Naomi: What about disadvantages?

Roy: One disadvantage is that during periods of inflation, inventory values on the balance sheet may be understated, leading to distorted financial ratios and potentially misleading investors.

Naomi: Can companies switch between inventory valuation methods?

Roy: Yes, companies can switch between inventory valuation methods, but they must disclose the change in accounting policies and explain the reasons for the switch.

Naomi: How do auditors ensure the accuracy of inventory valuation?

Roy: Auditors review the company’s inventory records, perform inventory counts, and assess the consistency and appropriateness of the inventory valuation method used.

Naomi: Thanks for the explanation, Roy. The “last in, first out” method seems like an important aspect of inventory management and financial reporting.