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Accounting Case Analysis - Lifo or Fifo

Autor:   •  December 5, 2015  •  Case Study  •  2,037 Words (9 Pages)  •  1,588 Views

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Case study                            LIFO or FIFO

Submission Date                  Sep-8-2015

Class:                                     Accounting

Submitted by

Objective:

Three companies changed their inventory accounting policy.  Find the reason behind the change and analysis the impact for the BS and PL. What accounting lesions we can learn from these two cases

Case1

Questions

  1. Use a table to show general effects of FIFO vs. LIFO

Answer:                        Difference between FIFO and LIFO

Market price rise

FIFO

LIFO

VS

Ending inventory

FIFO > LIFO

Total assets

FIFO > LIFO

COGS

FIFO < LIFO

Income tax

FIFO > LIFO

Net income

FIFO > LIFO

Current ratio

FIFO > LIFO

Return of investment

FIFO > LIFO

  1. (a)What factors should the management of Example Corporation in this case consider when deciding whether to switch from LIFO to FIFO at the beginning of Year 2?

(b) Would this change impact the balance sheet or income statement in a material way? Why or why not?

Answer: (a) When the company decide to switch its inventory method, it need to compare the impact of BS and P&L by using each method. FIFO will report a larger ending inventory and greater net income but pay more income taxes.  Continuing to use LIFO will lead to lower net income but lower taxes.  FIFO will give shareholders, investors or lenders more confidence to the company because the net income is higher than using LIFO. LIFO will lead lower taxes and saving cash for the managers. The company need to evaluate which demand is more urgent right now, to improve cash flow but have a risk that shareholders and investors don’t understand their decision or to keep shareholders have confidence to the company but to pay more tax.

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