Methods of Inventory and the Accounting Implications of each
Inventory costs are the costs relative to the storage as well as to the maintenance of stock over any certain period of time. Inventory ensures the existence of an active barrier between purchased goods and the sold ones. This ensures that the company avoids losses and maximizes its profits. Healthcare systems most often have to struggles with the determination of effective inventory systems (Kurt, 2010). This is due to a number of reasons ranging from security, the volatility of demand, temperature, to the age sensitiveness of items and, further, to the intricacy patient needs. Towards this end, the best methods of inventory, in as far as public healthcare is concerned, are the FIFO and LIFO. This paper is going to analyze the implication of using either the FIFO or the LIFO methods of inventory.
FIFO, the First In First Out method of inventory, conceptualizes that goods are sold in order of their purchase, such that, the goods purchased first, are also the first to be sold. As such, the inventory cost under FIFO will be the cost of current purchases. On the other hand, LIFO, the Last In First Out method of inventory, holds that goods are the sale of goods reverse the order of their purchase, such that, the goods that are last to be purchased, are the first to be sold (Epstein & Schneider, 2014). This means that the inventory cost under LIFO will be the cost of the initial purchases.
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Implications of using the FIFO method of inventory include but are not limited to the fact that it prevents outdated inventory, seeing as it uses goods in order of their reception, with the first goods to be received being given priority over the ones to have been received most recently; it also decreases the effect of inflation, owing to the fact that it disallows the manipulation of income, as such, the balance sheet amount as per the inventory, is likely to provide clear estimates of the current market value whilst also factoring in inflated profits due to increased production costs.
On the contrary, the effects of the LIFO method of inventory include that it gives an appropriate quantification of current earnings by matching current costs against recent revenues, and also that it lowers taxation as a result of inflation and manipulation of income or inventory value.
For healthcare managers to attain any notable market success, it is imperative that they apply an inventory method that best suits their organizational interests. More often than not, these are either the LIFO or the FIFO methods of inventory, both of which have benefits to the sector (Kurt, 2010). The FIFO inventory is time sensitive, as such, it can be used in order to assure the quick dispensation of drugs into the market, seeing as this cushions against the type of losses that arise from the expiry of drugs. With inflation, the costs of durable medical supplies, medical goods, and other items, valued at their purchasing price, are to be recorded on the company’s balance sheet as an asset until required for use. When the items are retrieved for use, then the practice of using FIFO which uses the earlier purchasing price will express a lower supply value unlike in LIFO where the current price is used
References
Epstein, L. & Schneider, A. (2014). Accounting for health care professionals. San Diego, CA: Bridgepoint Education, Inc.
Kurt, J. R. (2010). The changing LIFO-FIFO dilemma and its importance to the analysis of financial statements. Academy of Accounting and Financial Studies Journal, 14 (1), 34-43.
