Accounting Standards Essay

821 Words Nov 6th, 2013 4 Pages
Case 3-6 Accounting Standards

A. Given the income statement effects of LIFO versus FIFO, how will the balance sheet inventory amounts differ between General Motors and Ford versus Honda and Daimler-Benz? In other words, will inventory be reported amounts representing recent costs or older historical costs? In your opinion, which balance sheet amounts would be more useful to financial statement users in making decisions to buy or sell shares of a company’s stock?
Inventory is an asset that is intended for sale or goods that are produced for sale. To determine the value of inventory to be reflected in the balance sheet, purchases are added to the beginning inventory and then cost of goods sold are subtracted.
The FIFO and LIFO
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Under the current US Generally Accepted Accounting Principles (US GAAP), both inventory methods are acceptable. However, under the International Accounting Standards, the LIFO is now allowed.
In my opinion, the balance sheet that uses the FIFO method of inventory would be more useful in making decisions to buy or sell shares of a company’s stock because the FIFO method gives users a better indication of the value of the ending inventory and the balance sheet under the FIFO method would show a bigger amount of assets compared to the LIFO method. Likewise, the income statement of a company that uses the FIFO method would also show a higher gross margin and thus, the bottom line would be higher as well. However, investors also need to look at other components of the financial statements and analyze the trend of an entity to gain a better understanding of an entity’s operations, performance and net worth prior to deciding on whether to sell or buy that company’s stocks. B. Discuss the concept of conservatism. In your opinion, which is more conservative, General Motors, and Ford or Honda and Daimler-Benz? Explain.
Conservatism is “the approach of choosing an accounting method when in doubt that will least likely overstate assets and net income.” (http://www.wiley.com/college/acc/weygandt347736/site/glossary/home.htm#c). Conservatism conflicts with the qualitative characteristics such as neutrality. Because of this, the FASB has
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