Accounting Case Analysis - Lifo or Fifo
Autor: Joyce Li • December 5, 2015 • Case Study • 2,037 Words (9 Pages) • 2,059 Views
Case study LIFO or FIFO
Submission Date Sep-8-2015
Class: Accounting
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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
- 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 |
- (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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