Introduction
In business trade there are many evaluation methods to value the inventory. The last in, first out (LIFO) method is one of the proper methods in inventory valuation method. For some reasons in IAS 2 Inventories it is not able to be used any more, but it is still accepted by the Financial Accounting Standards Board (FASB) in the United States of America. LIFO refers that the last importing item of inventory is sold by the first purchased inventory. To use this method will lead to some potential financial questions, especially in the period of inflation. However, using this method can also avoid some questions in the period of inflation. This essay will analyse the main reasons why the USA will continue to accept this method
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So it will increase the cost of goods sold. However, the inventory is valued by the earlier lower price, so this will reduce the profit on sales (ibid). As a result, a company can use this method to reduce the level of its profitability.
2. Taxes problem
Because some companies use LIFO, they can defer recognizing the income taxes (Pincus, 1989). Most of the times this is the only one reason permitted by government, after all this method is not a wrong method (ibid.). USA Internal Revenue Service (IRS) states that if companies want to use LIFO valuation methods, then the financial report must also use the LIFO (Kieso, Weygandt and Warfield, 2001). But some companies try to use this method to reduce their gross profit to avoid handing in too much tax (Mulford and Comiskey, 2008). At least they can alter their gross profit about 15%-20% by LIFO (ibid.). So using this method can let government has too much cost of tax. There is one fact, in 2008 when the chairman Cox of International Accounting Standards Board (IASB) determined that let the companies in the USA to use the International Financial Reporting Standards (IFRS) in their financial reports (Johnson and Dhaliwal, 1988). For fitting the situation of USA, one change in this standard is banning the LIFO (ibid.). At the same time, the financial is very serious non-transparent in United States (ibid.). For the purposes of federal tax, they
A situation in which a company using LIFO accounting sells its oldest inventory. LIFO liquidation happens when the company's sales outpace its purchases for inventory. By using the LIFO inventory method this will the older you have to go back, the higher the net income. Inventory is always reported on the balance sheet. As you liquidate older inventory with the LIFO method you decrease your cost of good sold which will increase profitability.
As focusing on each of the five management assertions for the inventory account, we discovered that there are some risky areas that indicate the need for further attention during the audit. First of all, for existence or occurrence, all items in the inventory account must physically exist and be available for sale. Thus, the auditors should physically count finished goods, copper rod, and plastic inventories, and determine actual increase of inventories at year end. Also, they should select items from the inventory ledger and locate them and reconcile the quantity. Second, for completeness, the auditors should make sure that all existing inventories have been recorded completely , go around the warehouse and ensure all the inventories are recorded in the inventory ledger. Third, for valuation or allocation, the auditors should make sure that Laramie Wire manufacturing sticks with one valuation method(For inventory items, valuation is based on the lower of cost or market value, with several alternative methods for calculating cost), find out if there is any scrap inventory that needs to be recorded and written off ,and ask about obsolescence items. Fourth, for rights and obligations, the auditor should ask them if there is any consigned inventory at their warehouse. If there is, those inventories should not be recorded in the company's inventory ledger. Finally, for presentation and disclosure, the auditors should review the company's financial
The process requires Peyton Approved to discover how much inventory is sold and what the cost of goods will result in. The process requires the business to review three forms of merchandise inventory to determine which summary benefits the business’s operational behavior. One will discover when assuming that first inventory purchased by the store is the first to be sold, it is determined that the FIFO method displays the best financial outcome for the business. During the process of updating journal entries, one must enter the information proved appropriately into the T-accounts to add the balance under each record. Once the T-accounts for transactions and adjusted transactions are balanced, the next step is to enter the information provided on the balance sheet. The balance sheet will list Peyton Approved assets, liabilities and stockholders equity after added during the T-account process (Nobles, 2014). Once the balance sheet is completed the income statement, statement of retained earnings, and closing entries can be filled with the information proved. This will give the business a full review from journal entry to closing entries of the business for the six month accounting
Lowering the inventory would likely result in decreasing the currently unacceptable levels of customer service by removing that estimation buffer. Thus, without the reengineering of the production processes, the attempts to change the inventory levels may fail.
After reading Chapter 6 of the textbook and the materials I found that I was struggling to understand the material more than usual. Before reading this chapter I had a slight idea of how much effort went into keeping track of the costs and inventory. The most that I knew was that you had to keep track of it, I didn’t know that there are different ways to keep track of those costs. After reading more into the different ways to keep track of inventory I found that the one that stuck out most to me and was the one that I spent the most time trying to understand was the LIFO (Last In First Out).
330-10-35-1 A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longer as great as their cost. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, the difference shall be recognized as a loss of the current period. This is
When calculating the percentage change in inventories, an issue arises when using either the lower cost of market or the market value. When looking at the calculations for finished goods inventory (insulated wire) and copper rod inventory Laramie has applied the lower cost of market. However, the calculation pertaining to plastics inventory reveals that the market value should be used for classification, but Laramie has used cost. The percentage change of the plastics inventory if the $.12 per pound is used is a 27% decrease. The importance of classifying inventory correctly
(TCO 4) Inventory valuation methods determine the cost of goods sold and the inventory balance. (1) Explain how the First in First out (FIFO) method is applied (10 points) and (2) provide an example of the impact that this method of inventory valuation will have on Gross Profit. (15 points) (Points : 25)
The second types of inventory methods to value its inventory that CVS uses is the most common one used for most business the First-In, First-Out (FIFO). First-In, First-Out (FIFO) is defined as the first inventories bought are the first ones to be sold. CVS only uses FIFO for Some Retail Pharmacy and Rest of Business (Front store). CVS utilizes this method because; the fresher products have to be out the door first. Also, FIFO is an easier method than Weighted Average Cost. And most importantly it may over inflate cost because the last products bought and out the door first are usually the most expensive products.
This causes the price and the quantity move in opposite directions in a supply curve shift. Also, if the quantity supplied decreases at any given price the opposite will happen.
The Last in first out (LIFO) liquidation Inventory valuation method was changed as Inventory level in1984, 1983 and 1984 was decreased by Harnischfeger. By adopting this process, inventory that was purchased at lower cost in previous years was sold at higher prices.
My inventory control procedures provided both increased revenues and cost savings. Quite simply, I ordered adequate levels of products which were in high demand, I was able to better meet customers’ needs, and my revenues increased. The cost savings I experienced as a result of my inventory control procedures were a bit more complex. First, in establishing a routine schedule for ordering, I was able to reap the benefits of lower shipping costs. Because I had a routine schedule, I could
Because the product was leaving the warehouse and getting to stores quicker, I was able to reduce the storage space which was an initial problem so the increase of costs because of it decreased. The stores showed a moderate increase in profit.
To account for inventory, the company uses, first in first out policy. Property plant and equipment are recorded at cost less the accumulated depreciation amount. Depreciation is charged on straight line method