Analysis of the Lifo Inventory Valuation Method

Topics: Inventory, FIFO and LIFO accounting, Taxation Pages: 26 (8343 words) Published: February 22, 2012
University of Connecticut

DigitalCommons@UConn
Honors Scholar Theses Honors Scholar Program

5-10-2009

Analysis of the LIFO inventory valuation method during the onset of IFRS Joseph Louis Romeo
University of Connecticut - Storrs, joseph.romeo@uconn.edu

Recommended Citation
Romeo, Joseph Louis, "Analysis of the LIFO inventory valuation method during the onset of IFRS" (2009). Honors Scholar Theses. Paper 79. http://digitalcommons.uconn.edu/srhonors_theses/79

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An Analysis of LIFO inventory valuation

Joseph L. Romeo

Honors Accounting Thesis

December 5, 2008

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Table of Contents I. II. III. IV. V. VI. VII. VIII. IX. X. Introduction…………………………………………….3 The History of Inventory Accounting…………………4 A Closer Look at Inventory Valuation Methods……..7 The LIFO Debate-Proponents………………………....9 The LIFO Debate-Opponents………………………….10 LIFO and the Effect on Financial Ratios……………..16 LIFO Usage over the Past 10 Years…………………...18 Future of LIFO………………………………………....23 Effects of Repeal………………………………………..24 Conclusion……………………………………………....26

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An Analysis of LIFO inventory valuation Introduction Inventory accounting is one of the topics to be discussed as the U.S. contemplates adopting International Financial Reporting Standards (IFRS). The U.S. operates in a global economy; a main goal of IFRS is to enhance investor comparability of firms by adopting one set of accounting standards. The Securities and Exchange Commission (SEC) has recently released a statement justifying the adoption of IFRS and provided a timetable for this action. According to the news release, large, multinational institutions are allowed to switch to IFRS as early as December 2009; however, the SEC would not make an official ruling on the mandatory adoption of IFRS until 2011. The adoption of IFRS will dependent on certain factors, or “milestones.” In other words, the SEC will not implement a mandatory adoption of LIFO unless it is in the best interest of the public and investors. These milestones include: “improvements in accounting standards, the accountability of funding of the International Accounting Standards Committee (IASC), the improvement in the ability to use interactive data for IFRS reporting, education and training related to IFRS, limited early use of IFRS where this would enhance comparability for U.S. investors, the anticipated timing of future rulemaking for the Commission, and the implementation of the mandatory use of IFRS by U.S. issuers.”1 If adopted, IFRS rules would be implemented in 2014. The Last in, First out (LIFO) inventory accounting method has received scrutiny over the years because the method allows firms to understate their net income, and thus pay less in tax. Under IFRS, LIFO would be banned and firms would be required to use either the FIFO or the weighted average inventory method. The goal of this report is to provide an analysis of the LIFO inventory valuation method, which has had significant effects on firms over the years, and evaluate the decision to eliminate LIFO from U.S. financial reporting.

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SECURITIES AND EXCHANGE COMMISSION FR Parts 210, 229, 230, 240, 244 and 249 [RELEASE NOS. 33-8982; 34-58960; File No. S7-27-08] RIN 3235-AJ93

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Currently, the majority of firms value their inventory using one of two methods, the LIFO method or the First in, First out valuation method (FIFO). The use of LIFO instead of FIFO will have an impact on a firm’s net income, total assets, and noncurrent liabilities. An analysis comparing firms’ (with LIFO reserves) earnings under LIFO and FIFO for the previous 10 years will show the magnitude of the effect of using LIFO instead of FIFO and the discrepancies in...


Cited: Ayres, Frances L., et al.. A Glimpse at a World without LIFO. N.p.: n.p., n.d. Edward D. Kleinbard, George A. Plesko, and Corey M. Goodman, "Is It Time to Liquidate LIFO?" Tax Notes, Oct. 16, 2006, p. 237, Doc 200620617, 2006 TNT 20029 Kansas Structural Steel Company v. Lucas. U.S. Supreme Court. 14 Apr. 1930. 2008 FindLaw. 5 Nov. . Katz, David M. "How LIFO Could Stall Global Accounting." CFO 3 Dec. 2007. 4 Nov. 2008 . Dennis-Escoffier, Shirley. "IRS Issues Guidance on Changes in Accounting Methods." Journal of Corporate Accounting & Finance. Vol. 9. Wiley Periodicals, Inc., 2006. 105-112. Wiley InterScience®. June 2008. 3 Dec. 2008 . Kewalramani, Sunil. " Convergence of Ifrs, US Gaap and Indian Gaap and Its Impact on Indian Companies Listing in U.s and American Companies Listing in India." Concept Paper, 2 Nov. 2008. Convergence with IFRSs in India. 21 Nov. 2008 . Lessard, Stephen Charles,Giving Life to LIFO: Adoption of the LIFO Method of Inventory Valuation by the Income Tax Code. Tax Lawyer, Vol. 60, No. 3, 2007 Available at SSRN: http://ssrn.com/abstract=1048521 McIntyre, Bob. "Congressman Rangel’s Tax Bill Would Make the Tax Code Simpler & Fairer — and the Changes Are All Paid For." Citizens for Tax Justice 2 Nov. 2007. 21 Nov. 2008 < www.ctj.org/pdf/rangelbill.pdf >. Miller, Paul B W, and Paul R Bahnson. "Fortress LIFO is crumbling: It 's about time." Accounting Today. New York: Jan 28-Feb 10, 2008. Vol. 22, Iss. 2; pg. 13, 2 pgs. 11 Oct. 2008 < http://www.webcpa.com/article.cfm?articleid=26594>. Plesko, George. Committee on Finance, United States Senate. 13 June 2006. 21 Nov. 2008 . Plesko, George, “Does LIFO have a future?” Presentation at the University of Illinois Tax Symposium, October 2008. 27
Viard, Alan D. "Why LIFO Repeal Is Not the Way to Go." Tax Analysts 6 Nov. 2006. 5 Nov. 2008 . “Why repeal LIFO”.
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