Question

When comparing inventory amounts between two companies, does the choice of inventory method matter? Why or why not? Explain!

Answer 1

Yes, the choice of inventory method matters.

there are three methods of accounting for inventory

(1) First-in, First-Out (FIFO)

(2) Last-in, Last-Out (LIFO)

(3)Average cost

these are the methods which determine the cost of goods sold and value of ending inventory

comparison of inventory amounts of two companies is only possible when they deal in the totally similar inventory having similar nature and other qualities.

Now, if such two companies use different methods, the comparison of inventory amount is baseless because it distorts the comparing result which is of no use.

in simple terms, if a company uses LIFO and other uses FIFO, the cost per unit sold and cost per unit of ending inventory would not be the same. And therefore there will be no base to compare them.