FIFO And LIFO Analyze The Following Scenario At The Hospital

Fifo And Lifoanalyze The Following Scenario The Hospital For Ordinary

Analyze the following scenario: The hospital for ordinary surgery uses pharmaceuticals for its patients. It started the year on January 1, with an inventory of 1,000 doses of an antibiotic drug that cost $17 per dose. On January 2, it purchased another 300 doses for $21 each. From January 3 through June 30, it used 800 doses. On July 1, it bought 500 more doses at $23 each. From July 2 through the end of the year, it used 400 doses. What is the inventory value at the end of the year assuming FIFO? What is the value assuming LIFO? Clearly label the calculations of the inventory amounts using Excel. Use formulas to calculate the FIFO and LIFO inventories and format the cells to insert a comma if there are more than three numbers and round to the nearest whole number.

Explain the advantages and disadvantages of FIFO and LIFO inventory methods and evaluate which inventory method is best for this scenario.

Paper For Above instruction

The management of inventory costs plays a pivotal role in the financial reporting and operational efficiency of businesses, especially in sectors such as healthcare where pharmaceuticals are a significant component of inventory. The scenario presented involves calculating the ending inventory value using FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) methods, understanding their advantages and disadvantages, and determining the most appropriate inventory valuation method for the hospital context.

Inventory Calculations Using FIFO and LIFO

The beginning inventory on January 1 comprises 1,000 doses at $17 each, totalling $17,000. On January 2, a purchase of 300 doses at $21 per dose increases inventory with an additional $6,300 worth. The hospital then consumes 800 doses between January 3 and June 30, and purchases 500 more doses at $23 on July 1. Subsequently, 400 doses are used from July 2 to year-end.

FIFO Method

FIFO assumes that the oldest inventory is used first. The calculation begins with the initial inventory and subsequent purchases, deducting usage accordingly.

- Beginning inventory (January 1): 1,000 doses at $17 = $17,000.

- January 2 purchase: 300 doses at $21 = $6,300.

- Total inventory before usage: 1,300 doses.

- Usage (January 3 - June 30): 800 doses.

- Under FIFO, the 800 doses are taken from the earliest inventory:

- 800 doses from the initial 1,000 at $17.

- Remaining inventory after usage:

- 200 doses at $17 = $3,400.

- 300 doses at $21 = $6,300.

- July 1 purchase: 500 doses at $23 = $11,500.

- Remaining inventory after adding the July 1 purchase:

- 200 doses at $17.

- 300 doses at $21.

- 500 doses at $23.

- Usage from July 2 to the end of year: 400 doses.

- Taking from the earliest available inventory:

- 200 doses at $17 (remaining from initial stock).

- 200 doses at $21.

- Remaining inventory:

- 100 doses at $21.

- 500 doses at $23.

- Calculated inventory value:

- 100 doses at $21 = $2,100.

- 500 doses at $23 = $11,500.

- Total FIFO ending inventory = $13,600.

LIFO Method

LIFO assumes that the most recent inventory is used first.

- Beginning inventory: 1,000 doses at $17.

- January 2 purchase: 300 doses at $21.

- Total before usage: 1,300 doses.

- Usage (January 3 - June 30): 800 doses:

- 300 doses from the recent purchase at $21.

- 500 doses from the initial inventory at $17.

- Remaining inventory after usage:

- 500 doses at $17.

- 0 doses at $21.

- July 1 purchase: 500 doses at $23.

- Post-purchase inventory:

- 500 doses at $17.

- 500 doses at $23.

- Usage from July 2 to year-end: 400 doses:

- 400 doses taken from the latest purchase at $23.

- Remaining inventory:

- 100 doses at $23.

- 500 doses at $17.

- Inventory valuation:

- 500 doses at $17 = $8,500.

- 100 doses at $23 = $2,300.

- Total LIFO ending inventory = $10,800.

Comparison and Analysis

The FIFO ending inventory value is $13,600, which is higher than the LIFO value of $10,800. The variations in inventory valuation influence the reported profit and tax liabilities, especially in periods of inflation. FIFO typically results in higher net income during inflationary periods as older, lower-cost inventory is used up first, whereas LIFO yields lower net income and tax benefits due to higher recent costs being recognized first.

Advantages and Disadvantages of FIFO and LIFO

FIFO Advantages:

- Reflects actual physical flow of goods, especially in inventory categories with perishable items.

- Simplifies inventory management and valuation.

- Results in higher net income during inflation, potentially leading to better financial ratios.

FIFO Disadvantages:

- Higher taxable income during inflationary times, leading to higher taxes.

- Inventory on the balance sheet may be overstated, not reflecting recent costs.

- Can distort profitability ratios in inflationary environments.

LIFO Advantages:

- Matches current costs against current revenues, providing a more accurate picture of profits during inflationary periods.

- Reduces tax liability due to lower net income during inflation.

- Corresponds with the actual cash flow in many companies that liquidate recent inventory first.

LIFO Disadvantages:

- Can result in lower net income and retained earnings.

- Inventory valuation on the balance sheet may be understated.

- Not permitted under international accounting standards; only permitted in US GAAP.

- May lead to outdated inventory costs remaining on the books.

Choosing the Best Inventory Method for the Scenario

Given the hospital's context, where the inventory comprises pharmaceuticals with potentially significant cost variations over time and inflation, FIFO may better align with the natural flow of medicines—older stock is likely used first to prevent wastage of expired drugs. FIFO also provides more realistic inventory valuation for decision-making and is compatible with international standards. However, in terms of tax advantages, LIFO could reduce tax burden during inflationary periods but may not accurately reflect the actual physical flow or the real economic value of inventory.

Considering the critical importance of accurate inventory valuation in a healthcare setting for financial transparency and regulatory compliance, FIFO is generally more appropriate for hospitals handling pharmaceuticals, especially as it aligns with the perishability of medicines and provides a clearer picture of inventory worth. Nevertheless, the choice ultimately depends on regulatory frameworks, tax considerations, and management objectives.

Conclusion

In conclusion, both FIFO and LIFO have distinct benefits and limitations. FIFO provides a more realistic valuation for many industries, including healthcare, by reflecting current market prices and physical stock movement. LIFO, while beneficial for tax savings in inflationary climates, can distort true inventory worth. For the hospital scenario, FIFO seems to be the most appropriate method, providing reliable inventory and profit measures aligned with the inventory's nature and usage pattern.

References

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• Grosvenor, P. (2007). Why animal experimentation matters: The use of animals in medical research. Perspectives in Biology and Medicine, 50(2), 243–249.