Differentiate Between the Various Inventory Valuation Techniques Described in the Text

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The Answer is First in, first out (FIFO) is probably the most common valuation method in health care. It assumes that the first unit purchased is the first unit sold, and therefore the units that are remaining in inventory are the last units purchased. In an environment in which prices are rising, FIFO expenses the lower-costing items first, which therefore causes net income to be higher than other methods and leaves higher cost items as on the shelf in inventory at the end of the accounting period. Under last in, first out (LIFO) method, the premise is that the last unit purchased is the first unit sold. Alternatively, the oldest item in the inventory would be the first item purchased. This method assumes that sales are made from the most recently acquired units and that ending inventory is comprised of the oldest available goods. This method is generally problematic in health care in that it does not reflect the true physical flow of goods, where most medical supplies and drugs have expiration dates that require earlier products to be sold first. It does have an advantage in that it matches the most current cost against current revenues, but the balance sheet appears undervalued relative to current market or replacement costs. The net result is that net income under the LIFO would be lower using this method in this period, as long as quantities remain constant or increase. Weighted average assumes that the cost should reflect the averages of all items purchased over time and yields a lower net income than FIFO but higher than LIFO.

Differentiate Between the Various Inventory Valuation Techniques Described in the Text

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