Study Summary
Tanaka and Respati (2021) examined the FIFO (First In First Out) and LIFO (Last In First Out) approaches to calculating the Cost of Inventory under PSAK 14. The LIFO approach is not accepted because of worries about possible profit understatement and its effect on decreased tax liabilities, whereas the FIFO and average methods are. Using qualitative descriptive analysis, the researchers examined January 2020 oil, sugar, and rice sales and purchase records from CV Glory Dewi Kencana.
The research cast doubt on the long-held belief that FIFO always leads to higher earnings. It was discovered that FIFO calculation boosts business earnings amid rising purchase prices. Profits, however, decrease due to falling buying prices. It is worth noting that the LIFO mechanism, rejected by PSAK 14, actually increased earnings during price declines. This was especially true for oil and rice. In contrast, the company’s gross earnings declined due to LIFO’s impact on rising sugar costs.
This study set out to disprove the widespread belief that LIFO always results in lower earnings by examining the effects of several inventory calculation methods on profit and tax payments. Depending on commodity price patterns and market circumstances, the authors said that LIFO may lead to increased earnings (Tanaka and Respati, 2021). In light of this, they advocated LIFO for their target firms, even though FIFO is required under PSAK 14 for tax purposes.
Findings and Implications
The research gives insight into the complex interplay between inventory calculation methodologies and market conditions, casting doubt on the long-held belief that FIFO always increases profitability. It offers helpful guidance for businesses like CV Glory Dewi Kencana on valuing their inventory for financial reporting and tax purposes, emphasizing the importance of considering industry context and commodity pricing patterns when deciding between FIFO and LIFO.
It might be suggested that, in the context of Cost of Inventory (Brewer et al., 2022, Chapter 5: Supplement, p. 3), Tanaka & Respati (2021) shed light on the importance and complexities of the FIFO approach. The study finds a complex connection to purchase price volatility, disproving the traditional wisdom that FIFO reliably enhances earnings. Because of this inherent volatility, it is critical to be aware of current market conditions and commodity price patterns before using the FIFO method to value inventory.
The FIFO approach is significant because it follows generally accepted accounting rules. Regarding financial reporting and taxes, FIFO is relevant because it is recognized as a valid method for computing the Cost of Goods Sold (Brewer et al., 2022, Chapter 5: Supplement, p. 3). Companies should consider the potential volatility of profits due to market dynamics, yet the research emphasizes the need to contextualize the consequences of FIFO. Businesses, such as CV Glory Dewi Kencana, must have a comprehensive understanding of FIFO’s relevance to navigate changing market conditions and commodity price fluctuations.
Future Research
Regarding future studies, it would be instructive to investigate whether FIFO is better in certain business settings or whether other approaches, such as LIFO, are more suitable. Looking ahead, it could be helpful to examine how FIFO will be affected by new technologies or changes in supply chain dynamics (Kusumo & Rakasiwi, 2021). To better understand the method’s practical impact, it would be helpful to compare organizations that rigidly follow FIFO with those that use a more flexible approach, while accounting for profitability and tax consequences. Insights from this line of inquiry might help companies choose inventory valuation methodologies that best suit their specific operating contexts.
References
Brewer, P., Garrison, R., & Noreen, E. (2022). Introduction to managerial accounting (9th ed.). McGraw-Hill.
Kusumo, H., & Rakasiwi, S. (2021). Information system supply chain management with FIFO perpetual method. Advance Sustainable Science, Engineering and Technology, 3(2), 0210205.
Tanaka, G. M., & Respati, H. (2021). Cost of inventory calculation analysis using the FIFO and LIFO methods. Journal of Business Management and Economic Research, 5(4), 109–120.