Accounting Memo interoffice memo
to: Accounting Team mate from: Andrew Accountant subject: LIFO FIFO explanation date: 6/10/2015
We need to get together later this week—boss has requested we give her an overview of Last In/First Out (LIFO) versus First In/First Out (FIFO) as it might apply to our company. She needs the background info to present to our president and the board late this month. This is to help management make the decision of which inventory valuation method the company should used.
Because we may be coming into inflationary economic times, it is possible we might recommended that the company continue to use LIFO so we can continue to reduce our federal and state corporate income taxes—this could provide the company with a better cash flow and profit margin. The question we need to research and discuss is whether we think this economic situation will continue so that our Cost of Good Sold (COGS) will be increasing over the short and long term and our inventories cost keep rising.
As you know, choosing LIFO or FIFO for inventory will affect our P&L statements. If costs stay where they are now, we will want to see how we can move to LIFO. If costs go up as we expect next year, we should stay with FIFO inventory.
FIFO= Income statement reflects a higher income because the COGS is lower in value; inventory on balance sheet has higher value.
LIFO= The income statement reflects a lower income because COGS is higher; on the balance sheet the inventory value is lowered.
No matter which method we suggest or recommend, we will have to use it going forward. With our elastic pricing structure, we will have difficulty increasing the price to off-set the COGS increase next year. We need to also keep in mind that if we use LIFO for inventory, we have to use LIFO for financial reporting.
Did you see the news that Macy’s recently won a test case against the United States that approved its right to use LIFO? This