Case study LIFO or FIFO
Submission Date Sep-9-2015
Three companies changed their inventory accounting policy. Find the reason behind the change and analyze the impact of the change on the Balance Sheet and Profit & Loss. What accounting lessons we can learn from these two cases?
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…show more content… Answer: (b) The change from LIFO to FIFO impacts both the balance sheet and income statement in a material way. The ending inventory increased by $850K from $1,350K to $2,200K and the COGS decreased by $450K from $4,200K to $3,750K. The GP ratio increased from 24% to 32% and the percentage of revenue of net income increased from 4% to 9%.
3. What would have happened if Example Corporation in this case had been using FIFO at the beginning of Year 1, instead of using LIFO that year?
‘000 | Year 1(LIFO) | Year 1(FIFO) | Difference | Ending inventory | 1,350 | 1,750 | 400 | Income Statement | | | | Sales | 5,000 | 5,000 | - | COGS | 3,300 | 2,900 | (400) | GP | 34% | 42% | 8pts | Income tax | 245 | 385 | 140 | Net income | 455 | 715 | 260 |
Answer: If the corporation had used FIFO, the ending inventory would have increased by 400K from 1,350K to 1,750K and the COGS would have decreased by 400K from 3,300K to 2,900K. The GP ratio would have increased from 34% to 42%. The income tax would have increased by 140K from 245K to 385K and the net income would have increased by 260K from 455K to 715K.
4. How would Example Corporation and their accounting choices have differed if inventory purchase prices had been stable or had been falling, over the two-year period?
Answer: If inventory purchase prices had been stable, there would be no difference between FIFO and LIFO. Therefore, the Corporation would not change its