Selection of an Inventory Method
As controller of a widely held public company, you are concerned with making the best decisions
for the stockholders. At the end of its first year of operations, you are faced with the choice of
method to value inventory. Specific identification is out of the question because the company sells
a large quantity of diversified products. You are trying to decide between FIFO and LIFO.
Inventory costs have increased 33% over the year. The chief executive officer has instructed you
to do whatever it takes in all areas to report the highest income possible.
1. Which method will satisfy the chief executive officer?
2. Which method is in the best interest of the stockholders? Explain your answer.
3. Write a brief memo to the chief executive officer to convince him that reporting the highest
income is not always the best approach for the shareholders.