Memo
I am a graduate student form Kelley Business School at Indiana University and setout working at your accounting department in Ling Clothing Company. During look through the financial statement, I find some of transactions and events have a few mistakes in your company, which conflict with accepted accounting theory and GAAP. There are some mistakes I will present:
The company switched from FIFO to LIFO in accounting for inventory. The preceding year it had switched from the weighted-average method to FIFO. I think it is conflict with accounting theory. First, accounting method should not be changed year to year. The company should apply for changing the accounting method by giving some reasonable reasons. After permitted, the company can change the method. But it should be indicated. Second, if the company uses LIFO for tax purposes, it must also use LIFO for financial statement purposes. So no indication of this switch appears in the financial statements is not correct. In addition, IFRS does not allow LIFO. So it is better to keep FIFO method.
An old truck was traded for a new truck. Since the trade in value of the old truck was higher than its book value, a gain was record on the transaction. I think this record conflict with accounting theory and have impact on income statement. Actually, this transaction is a like-kind exchange. It is a transaction that allows an asset exchange for another replacement asset without generating a current tax liability from the sale of the first asset. No gain should be recorded on this transaction since both trucks are like-kind assets. Both trucks have the equal value during this transaction. If the gain was recognized, it would overstate the net income in order to overstate the income statement.
If you have some questions, please contact me.
The company switched from FIFO to LIFO in accounting for inventory. The preceding year it had switched from the weighted-average method to FIFO. I think it is conflict with accounting theory. First, accounting method should not be changed year to year. The company should apply for changing the accounting method by giving some reasonable reasons. After permitted, the company can change the method. But it should be indicated. Second, if the company uses LIFO for tax purposes, it must also use LIFO for financial statement purposes. So no indication of this switch appears in the financial statements is not correct. In addition, IFRS does not allow LIFO. So it is better to keep FIFO method.
An old truck was traded for a new truck. Since the trade in value of the old truck was higher than its book value, a gain was record on the transaction. I think this record conflict with accounting theory and have impact on income statement. Actually, this transaction is a like-kind exchange. It is a transaction that allows an asset exchange for another replacement asset without generating a current tax liability from the sale of the first asset. No gain should be recorded on this transaction since both trucks are like-kind assets. Both trucks have the equal value during this transaction. If the gain was recognized, it would overstate the net income in order to overstate the income statement.
If you have some questions, please contact me.