Question

1. As the corporation considers whether to continue using LIFO in future periods or switch to FIFO, what factories should be considered? Are there one or two single compelling reasons why they should choose either of the options?

2. If they were to change to FIFO - how will that impact the balance sheer and income statement?

3. Let's say that we experienced an increased level of inflation in future period's with price rising more quickly than average. How would you consider this factor as you decide which method to use?

4. Are there any challenges to using LIFO as the method to handle your inventory accounting?

5. As the CFO - which path would you choose?

Answer 1

1.If the cost of buying inventory were the same every year, it would make no difference whether a business used LIFO or FIFO. But costs do change. For many products, costs rise every year. Businesses that sell those products benefit from using LIFO.

In the LIFO method profit will be less then FIFO method and also tax will be save certain percentage of excess expenditure.corporation will have lower income tax payments with LIFO.

In the both example , under LIFO method cost of good sold is more then FIFO method that result .profit will be shown in income statement under LIFO method less than FIFO METHOD.

2.If they were to change to FIFO,the impact under income statement will be increse in profit and tax payable will also increase . the impact in balance sheet will be show more inventory and profit.

3.If inflation were nonexistent, then all three of the inventory valuation methods would produce the same exact results. When prices are stable, our bakery would be able to produce all of its bread loaves at $1, and LIFO, FIFO, and average cost would give us a cost of $1 per loaf. But prices do tend to rise over the long term, which means that the choice of accounting method can dramatically affect valuations.

LIFO is not a good indicator of ending inventory value because the leftover inventory might be extremely old, perhaps obsolete, which results in a valuation much lower than today's prices. The LIFO method results in less net income because COGS is greater.

FIFO gives us a good indication of ending inventory value, but it also increases net income because inventory that might be several years old is used to value COGS. And although increasing net income sounds good, remember that it also has the potential to increase the amount of taxes that a company must pay.

4.. there are certain  challenges to using LIFO as the method to handle your inventory accounting shown as below

a.the LIFO method reduces reported earnings during the periods of inflation.

b.Under LIFO method, the balance sheet inventory figure is usually understated because it is based on the oldest costs. .

c.A company using last-in, first-out (LIFO) method can easily manipulate its reported earnings for a period by changing its purchase pattern at the end of the year.

d.The LIFO liquidation may inflate the reported income for a given period that results in higher tax payments for the period.

5.As the CFO, i will follow LIFO method in case of indication of increasing in price . i will follow FIFO method in case of price inflation . i will follow any one method in case of constant price.