Inventory Cost Flow Assumptions and Limitations of Lifo: A Case Study of a Manufacturing Firm in Albania

Abstract

Valuing inventory at cost is crucial for understanding a firm's expenses, gross profit, taxes, net income, and ending inventory during a specific accounting period. This study focuses on inventory cost flow assumptions under IFRS and U.S. GAAP standards. In the Albanian accounting system, Specific Identification (SI), First In, First Out (FIFO), and Weighted Average Cost (WAC) methods are accepted. Among these, FIFO and WAC are the most commonly used inventory cost flow assumptions. The study also examines the reasons for the ban on Last In, First Out (LIFO) cost flow assumption by IFRS and Albanian accounting standards. An empirical analysis using a case study of a manufacturing firm reveals that the WAC assumption is more favorable, as it results in lower cost of goods sold (COGS) and an ending inventory cost that closely aligns with current market prices.