Inventories and Cost of Goods Sold – Essay Example
The paper "Inventories and Cost of Goods Sold" is a great example of an essay on finance and accounting. Students face difficulty in understanding the difference between the physical flow of inventory and the cost flow assumption because the cash flow does not consider taxes in its computations unlike the physical flow of inventory (Greenberg & Wilner, 2011). This arises because taxes are not permanently reduced, but deferred. It implies that the reduced amount will still be remitted to the tax authorities after the decrease in the cost of inventory. It is also apparent that the deferred tax owed by an organization is beneficial during inflationary periods since it reduces net income. Another reason that causes confusion between the physical flow of inventory and the cost flow is the earnings in which costs are charged off against current revenues (Greenberg & Wilner, 2011). This takes place during inflationary periods when prices of goods are high and the company tends to reduce its costs by hiking charges. It is also evident that the cost flow assumption is different from the physical flow of the products because a firm can turn around inventory through the sale of its oldest units first and then run the overheads using LIFO or weighted average (Greenberg & Wilner, 2011). This suggests that firms normally switch cost flow assumption from FIFO to LIFO during inflation. As a result, spreading the current higher overhead costs into the cost of goods sold (COGS) on the income statement and tax return reveals a positive net income and less payable returns. In this regard, the disparity evident between the physical flow of inventory and the cost flow assumption relates to the taxes and net income that a firm attains to achieve when prices are higher in the market (Greenberg & Wilner, 2011).