If the FIFO inventory method was used last period, it should be used for the current and following periods (unless disclosed otherwise). This follows A. consistency B. materiality C. timeliness D. verifiability
The correct answer and explanation is:
The correct answer is A. consistency.
The principle of consistency in accounting requires that once an entity adopts a particular method of accounting, such as FIFO (First-In-First-Out) for inventory, it should continue using that method consistently in future periods unless a change is disclosed and justified. This is essential because consistency enhances comparability of financial statements over time. If an organization keeps changing accounting methods frequently, it could confuse stakeholders, such as investors and regulators, who rely on the historical comparability of the financial data to make informed decisions.
The idea behind consistency is not just about using the same method for inventory valuation but also applies to other accounting policies, such as depreciation methods, revenue recognition, and treatment of leases. When a company changes its accounting method, it must disclose the change and explain the reason for it in the financial statements, ensuring transparency. For example, if a company switched from FIFO to LIFO (Last-In-First-Out) inventory accounting, it would need to explain the impact on the financial results and the reason for the switch.
The consistency principle ensures that financial statements remain reliable and useful for decision-making. Stakeholders, such as analysts and investors, rely on trends in financial performance to make predictions about future performance. If companies constantly switch accounting methods, it would distort these trends and undermine the reliability of financial reports.
Consistency in applying inventory methods also reduces the risk of manipulation, as it limits the ability of management to alter the reported profitability by choosing different accounting treatments based on the desired financial outcome. Therefore, the consistency principle is a cornerstone of reliable financial reporting, making it an essential concept in accounting.