Student Name: ZHANG QIWEI
Student ID Number: B414498
Arguments for and against LFO abolition in the US
What are the arguments in favour of retaining LIFO? The arguments are being made on a number of different grounds so be clear to separate these out. What are the arguments in favour of the US abolishing LIFO?
Should decisions on matters such as this be made on the basis of what is the most appropriate from an accounting perspective (i.e. principles) or from the perspective of the impact of the decision on the real economy (i.e. profits, jobs, growth)? Decide which of these two arguments you support on balance and justify your choice. What are the arguments in favour of retaining LIFO? The arguments are beint made on a number of different grounds so be clear to separate these out. Some business community in favour of retaining LIFO. Especially manufacturers, oil and gas companies, and other business that carry large inventories. Their taxes could increase a lot if they could no longer use LIFO. LIFO is particularly important to companies that have slow-moving inventory – such as industrial manufacturers and distributors – and are therefore vulnerable to rising prices. LIFO accounting is a “timing issue”, rather than a tax gimmick. LIFO accounting reverses itself when demand drops. When companies reach lower-cost inventory layers last year as demand solwed, and at that point, profits rose under LIFO accounting and the company had to pay more in taxes. The same is true when deflation sets in. As the price of replacement inventory drops, taxable income increases, and so does a company’s tax obligation. Without LIFO, there is a “mismatch between what it’s going to cost us to put inventory back on the shelf and what we bought it for six months ago, when it may have cost less.” The elimination of LIFO is a cash-flow issue. Smaller companies with high LIFO reserves and low cash flows could run into problems. Some large companies say the change would still...
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