Top-Rated Free Essay
Preview

Accounting - Decision Case 5-10

Satisfactory Essays
404 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Accounting - Decision Case 5-10
Decision Case 5-10
a). The CEO is mainly concerned with reporting the highest amount of income possible. Thus the CEO will be pleased if the company uses the FIFO method. This method recognizes as cost of goods sold the oldest costs, and because prices are rising, the costs charged to cost of goods sold will be less than if LIFO is used.

b). It would be difficult to state absolutely which method is truly in the best interest of the stockholders, as FIFO results in lower COGS on the income report; it also results in higher earnings. But when earnings are higher so the taxes are also higher. And when taxes are higher, after-tax earnings become lower. On the other hand, LIFO results in lower pre-tax earnings since COGS are higher and therefore lower taxes and therefore higher after-tax earnings. The interplay between pre-tax earnings, taxes and after-tax earnings is a complicated one and proper analysis must be used to choose the best accounting method for any given company in interest of stockholders. The LIFO method minimizes the amount of income taxes paid since this method would report the highest costs of goods sold and thus the lowest income before taxes. From a cash flow perspective, LIFO is the most advantageous method in a period of rising prices and also in favor of stockholder’s.

c). Memo to the CEO:
As we end our first year of operations, I am aware of the need to present a favorable impression to our stockholders. In this regard, I would like to address the selection of an inventory valuation method.
I can appreciate your interest in maximizing income whenever possible. However, a method of inventory valuation that addresses this objective will not necessarily satisfy our other concerns. Certainly one of our primary concerns should be to minimize the payment of taxes whenever possible.
FIFO will result in the lowest amount reported as cost of goods sold and thus an income number which is higher than if LIFO were used. For this reason, however, the use of FIFO will result in a higher amount of taxes payable than if LIFO were used. It is my opinion that we should attempt to conserve cash whenever possible, and thus I believe that we should adopt the LIFO method of inventory valuation.

Thank you for the opportunity to present my views on this important matter.

You May Also Find These Documents Helpful

  • Powerful Essays

    ACC 290 IFRS v. GAAP

    • 1158 Words
    • 4 Pages

    Krishnan, S., & Lin, P., C.M.A. (2012). Inventory valuation under IFRS and GAAP. Strategic Finance, 93(9), 51-58. Retrieved from http://search.proquest.com/docview/1016754559?accountid=458…

    • 1158 Words
    • 4 Pages
    Powerful Essays
  • Satisfactory Essays

    Week 8 Acc 290

    • 582 Words
    • 3 Pages

    The cost of goods sold is $240 less when FIFO is used then when LIFO is used. This is the amount that is the phantom profit. It is considered to be the “phantom profit” because when using FIFO it matches the current selling prices to the old inventory costs. In order for the company to replace the units they sold, they will have to pay the higher current price of $8 per unit.…

    • 582 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    b) ASC 926-330-35-1: This references how an entity can evaluate their inventory at the end of a period. Manly to do with products help for sale, meaning items that are in inventory and that your business is going to be selling to clients. The inventory can be evaluated at the net realizable value, meaning the sale of the product minus the cost associated with it.…

    • 312 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    IFRS vs ASPE

    • 487 Words
    • 2 Pages

    Inventory is defined as “assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or in the rendering of services”. The cost of inventory is measured at the lower of cost and net realizable value. The IFRS accounting for inventory is generally converged with ASPE. The only difference between IFRES and ASPE in the accounting for inventory is with borrowing costs. Since some inventory products require significant manufacturing time (qualifying assets), a manufacturer will finance its operating costs by borrowing money. Under ASPE we can choose to capitalize borrowing costs relating to inventory that takes substantial time to get it ready for sale. In comparison with IFRS, borrowing costs associated with qualifying assets are capitalized.…

    • 487 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Acc291 Reflection Week 4

    • 460 Words
    • 2 Pages

    When preparing a statement of cash flows, there are two different methods that can be used; there is the direct method, and there is also the indirect method. The direct method shows operating cash receipts and payments, making it more consistent with the objective of a statement of cash flow, while the indirect method adjusts net income for items that do not affect cash. The FASB allows both methods to be used because in the end the results of the total amount for net cash provided by operating activities arrive in the same way. Companies use numerous adjustments when preparing such statements so following a proper guide such as the direct method or indirect method will help to ensure that everything is properly in order the way it should be.…

    • 460 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Chapter 9 Quiz

    • 1442 Words
    • 6 Pages

    To produce an inventory valuation which approximates the lower of cost or market using the conventional retail inventory method, the computation of the ratio of cost to retail should…

    • 1442 Words
    • 6 Pages
    Good Essays
  • Satisfactory Essays

    I chose one of Walmart's biggest competitors. Target uses the LIFO method. The LIFO method has its advantages and disadvantages just like the FIFO method. So as prices rise the cost of purchasing merchandise goes up, since they are using the LIFO method those cost are recouped faster. Next all business need to keep track of their revenues and cost so it can continue to thrive, so I feel using the LIFO would be better for the business to keep track of that information. Lastly the LIFO method keeps a business reporting taxes as low as they can possible be. Now some of the disadvantages of the LIFO method, so we mentioned rising prices but if the cost of purchasing merchandise drops using this method would have an opposite effect and would take…

    • 204 Words
    • 1 Page
    Satisfactory Essays
  • Good Essays

    Harnischfeger

    • 1068 Words
    • 5 Pages

    5. In Note 7, Harnischfeger describes the effect of LIFO inventory liquidation on its reported profits in 1984. Describe what is meant by LIFO liquidation and how liquidation affects a company’s income statement and balance sheet. If a company decides to perform a LIFO liquidation, the old costs will be matched with the current higher sales prices. Thus, a cost to using the LIFO liquidation method is higher tax liability if prices have risen since LIFO was adopted. The expected tax advantage of LIFO turns into a disadvantage because older, lower costs (of older inventory) are…

    • 1068 Words
    • 5 Pages
    Good Essays
  • Satisfactory Essays

    Summary for LIFO Method

    • 418 Words
    • 2 Pages

    Reasons why the LIFO method should not be repealed in the context of business tax reform…

    • 418 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    1. Assume the solution to item 1 in the case is approximately 20%. Prepare a…

    • 1109 Words
    • 5 Pages
    Powerful Essays
  • Satisfactory Essays

    sales and inventory

    • 687 Words
    • 3 Pages

    Many companies are using Sales and Inventory Systems for the success and growth of their business. Sales and Inventory Systems have a variety of functions and purposes in promoting the sales and shrinkage control. Promoting the sales function deals with availability of sufficient products for the customers where in shrinkage control function deals with monitoring the occurrence of damage loss, or theft, and etc. of the products. A very important function of inventory control systems is asset valuation; that establishing the value of the products on the shelf for tax purposes at the end of the…

    • 687 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    The Undertaker

    • 1067 Words
    • 5 Pages

    10. Is the basis for use of lower-of-cost-or-market valuation of inventory. 11. Requires measurement of the income and financial position of entities at regular intervals.…

    • 1067 Words
    • 5 Pages
    Satisfactory Essays
  • Powerful Essays

    client understanding

    • 1566 Words
    • 5 Pages

    The adjusting lower cost of market inventory valuation is essential because through the life cycle of inventories, the inventories will decline in value. Although the primary basis of accounting for inventories is cost, when inventories usefulness become lower than cost, then the use of adjusting lower cost of market is accepted. There are many advocates that think that inventories should be valued at market price. The belief is assets should reflect current values. Generally Accepted Accounting Principles (GAAP) instructs that when inventories decline in value, the future selling price should move in the same direction in the same time period. The…

    • 1566 Words
    • 5 Pages
    Powerful Essays
  • Satisfactory Essays

    Joan Holtz

    • 329 Words
    • 2 Pages

    After identifying the amount of inventory that was spoiled, the amount would get deducted from the inventory and would be added to the COGS and would be considered as cost of sales.…

    • 329 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Module 6 Answers

    • 7562 Words
    • 53 Pages

    If inventory costs are stable, the per unit dollar cost of inventories (beginning or ending) tends to be approximately the same under different inventory costing methods and the choice of method does not materially affect net income. To see this, remember that FIFO profits include holding gains on inventories. If the inflation rate is low (or inventories turn quickly), there will be less holding gains (inflationary profit) in inventory.…

    • 7562 Words
    • 53 Pages
    Satisfactory Essays