Case study LIFO or FIFO
Submission Date Sep-9-2015
Class: Accounting
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Objective:
Three companies changed their inventory accounting policy. Find the reason behind the change and analyze the impact of the change on the Balance Sheet and Profit & Loss. What accounting lessons we can learn from these two cases?
Case 1
Questions
1. Use a table to show general effects of FIFO vs. LIFO
Answer: Difference between FIFO and LIFO Market price rise | FIFO | LIFO | VS | Ending inventory | ↑ | ↓ | FIFO > LIFO | Total assets | ↑ | ↓ | FIFO > LIFO | COGS | ↓ | ↑ | FIFO < LIFO | Income tax | ↑ | ↓ | FIFO > LIFO | Net income | ↑ | ↓ | FIFO > LIFO | Current ratio | ↑ | ↓ | FIFO > LIFO | Return on investment | ↑ | ↓ | FIFO > LIFO |

2. (a)What factors should the management of Example Corporation in this case consider when deciding whether to switch from LIFO to FIFO at the beginning of Year 2?
(b) Would this change impact the balance sheet or income statement in a material way? Why or why not?
Answer: (a) When the company considers whether to switch its inventory method, the impact on the Balance Sheet and P&L for each method needs to be considered. FIFO will allow report of a larger ending inventory and greater net income, but the company will pay more income taxes. Continuing to use LIFO will lead to lower net income but lower taxes. FIFO will also give shareholders, investors, and lenders more confidence in the company because the net income is higher than using LIFO. LIFO will lead to lower taxes and greater cash savings which is attractive for the company managers. The company needs to evaluate which demand is more urgent right now; improving cash flow but risking that shareholders and investors