The following is an excerpt from a conversation between Gary Ortiz, the warehouse manager for Ivey Foods Wholesale Co., and its accountant, Lori Cray, Ivey Foods operates a large regional warehouse that supplies produce and other grocery products to grocery stores in smaller communities.
Gary: Lori, can you explain what’s going on here with these monthly statement?
Lori: Sure, Gary, How can I help you?
Gary: I don’t understand this last-in, first-out inventory procedure. It just doesn’t make sense.
Lori: Well, what is means is that we assume that the last goods we receive are the first ones sold. So the inventory consists of the items we purchases first.
Gary: Yes, but that’s my problem. It doesn’t work that way! We always distribute the oldest produce first. Some of that produce is perishable! We can’t keep any of it very long or it’ll spoil.
Lori. Gary. You don’t understand. We only assume that the products we distribute are the last ones received. We don’t actually have to distribute the goods in this way.
Gary: I always thought that accounting was supposed to show what really happened. It all sounds like ‘made believe’ to me! Why not report what really happens? Respond to Gary’s concerns?