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.
