Keywords: first-in first-out method; LIFO method; accounting
First, the scope of inventory valuation method selection
The inventory of an enterprise is constantly flowing. In the actual circulation process, in fact, the logistics circulation order and the cost circulation order are inconsistent, as long as the cost of issuing inventory and the cost of inventory are determined according to different cost circulation orders. In this way, the circulation assumption of inventory cost appears. Based on the assumption of inventory cost cycle, the cost allocation is carried out between ending inventory and issuing inventory, resulting in different inventory cost allocation methods, that is, the pricing method of issuing inventory. China's "Accounting Standards for Business Enterprises" stipulates: "When issuing all kinds of inventories, enterprises can choose FIFO method, weighted average method, moving weighted average method, individual valuation method and LIFO method to determine their actual costs according to the actual situation."
Individual valuation method is to identify the cost of each wholesale inventory and ending inventory one by one, so it is only suitable for inventory valuation with easy identification, small inventory quantity and high unit cost. So this method is not widely used; The weighted average method and moving weighted average method estimate the inventory in the form of average value, which neither reflects the original value of the inventory nor the current market price of the inventory. Therefore, these two methods are not conducive to inventory management, FIFO method and LIFO method. Because of the application of computers in the accounting field, although the calculation workload is relatively large, it is not a disadvantage. Relatively speaking, these two methods are more reasonable than the other three methods.
Second, the first-in first-out method and the last-in first-out method affect the finance and tax payment of enterprises.
At present, China implements the socialist market economy, and the inflation that follows is inevitable. Although the price continues to rise, it is not very large, but it has caused the phenomenon that the book inventory value deviates from the market value. The first-in-first-out method assumes that the inventory purchased first is sold first, which means that the cost of selling products consists of the initial inventory and the earliest inventory purchased. In this way, the value of the issued inventory is lower than the market value, the product sales cost is low, the current profit is inflated, and the income tax expense is increased. The LIFO method assumes that the goods are put into storage first, so that the value of the delivered inventory will be close to the present value, the sales cost will not be reduced, and the profit and income tax expenditure will be reduced. Under the FIFO method, the ending inventory is high, the product sales cost is low, the pre-tax profit, income tax and net profit are high, the cash flow is low and the operating cost is high. The LIFO method is the opposite. It can be seen that enterprises can reasonably reduce income tax expenses by adopting LIFO method. If an enterprise initially adopts the first-in first-out method, it should be disclosed in the notes to the accounting statements when it changes to the last-in first-out method during the period of rising prices. Because there are many kinds of inventories in enterprises, which are frequently sent and received, it is impossible to reasonably determine the cumulative impact number according to the principle of cost-effectiveness, so the future application method is adopted to adjust the usual inventory valuation method.
LIFO method has a negative impact on enterprise performance evaluation. For a well-known large enterprise that strives to become a big taxpayer, its tax payment and enterprise performance are the most convincing advertising brands. Therefore, they don't care much about saving income tax expenditure, but often pay more attention to their position in the eyes of consumers and the government's support and support for enterprises. This kind of enterprises generally do not choose the LIFO method.
The first-in first-out method is just the opposite of the last-in first-out method. It attaches importance to the inventory problem in a regular order, so that it will not reduce the income tax expenditure, and of course it will not erase the net income of the enterprise, which is very beneficial to the performance evaluation of the enterprise. For small private enterprises, reducing income tax expenditure is one of their goals. Therefore, small enterprises often turn to LIFO method instead of this method to reduce costs.
Third, the influence of the choice of first-in first-out method and last-in first-out method on the analysis index of enterprise financial ratio
Firstly, the influence of different inventory valuation methods on short-term solvency and current ratio analysis indicators. Due to different valuation methods, the difference of inventory account balance will directly affect the short-term solvency and liquidity ratio analysis indicators in the ratio analysis of financial statements. These indicators mainly include current ratio, inventory turnover rate, business cycle, ratio of sales to working capital, etc. The above indicators all include items directly affected by inventory: current assets, product sales cost, average inventory and working capital. Therefore, under the first-in first-out method, the inventory turnover rate is low, and the current ratio, inventory turnover days and business cycle are high. But under the LIFO method, the situation is just the opposite. Secondly, the influence of different inventory valuation methods on the analysis index of enterprise profitability. The main indicators to evaluate the profitability of enterprises are gross profit margin, net interest rate and earnings per share of common stock. These indicators all involve profits, so the first-in first-out method will overestimate the profitability of enterprises, while the last-in first-out method will not.
Third, the impact of different inventory valuation methods on the long-term solvency ratio index of enterprises. In the analysis of long-term solvency, the multiple of interest income reflects the ability of enterprises to pay interest expenses with the profits obtained. Under the first-in-first-out method, because the pre-tax profit is overestimated, the multiple of earning interest will also be overestimated, so the long-term solvency of enterprises is exaggerated.
Finally, the impact of different inventory valuation methods on the market value analysis indicators of listed companies. For listed companies, the P/E ratio is a very important indicator, which shows the rate of return on investing in a listed company's stock and reflects the growth of listed companies. Under the FIFO method, if the inventory cost is overestimated, the product sales cost will be underestimated, with high net profit and low P/E ratio. Under the LIFO method, the P/E ratio is moderate.
It can be seen that the first-in-first-out method has an impact on almost all the ratio indicators in the ratio analysis of financial statements, especially overestimating the profitability indicators of enterprises and exaggerating the current profitability of enterprises, while the last-in-first-out method only has a certain impact on the short-term solvency ratio indicators.
Fourth, the expansion of inventory valuation methods.
There are many methods of inventory valuation, but the author thinks that LIFO is the ideal method of inventory valuation in China at present. First of all, the inflationary economic environment has created objective conditions for the adoption of LIFO. Although in order to weaken the impact of inflation, methods to reduce costs and market prices have been proposed, but this method has not been widely used in China. Secondly, LIFO method can not only carefully reflect the current accounting profits, avoid excessive distribution of corporate profits and safeguard the long-term interests of investors and creditors, but also objectively reflect the current sales costs, match the current income and meet the objective requirements of accounting information.