...Arguments for and against LFO abolition in the US a) 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. b) What are the arguments in favour of the US abolishing LIFO? c) 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)? d) Decide which of these two arguments you support on balance and justify your choice. a. 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...
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...Readiness Series The uncertain future of LIFO* The uncertain future of LIFO This paper was authored by Christine Turgeon, a partner; Scott Rabinowitz, a director; Helen Poplock, a director; and Sean Pheils, a senior associate with PricewaterhouseCoopers’ Washington National Tax Services (WNTS) practice. For over 70 years, US taxpayers have been able to value the cost of their inventories using the last-in, first-out inventory method of accounting (LIFO). In general, to use LIFO for federal income tax purposes, taxpayers must also use LIFO for financial reporting purposes (herein referred to as the LIFO conformity requirement). The use of LIFO for financial reporting purposes is not permitted under International Financial Reporting Standards as promulgated by the International Accounting Standards Board (IFRS). As a result, a conversion from US generally accepted accounting principles (GAAP) to IFRS likely will eliminate a taxpayer’s ability to use LIFO for federal income tax purposes. Moreover, the fact that LIFO is not permissible under IFRS has led many policymakers to debate whether LIFO should be permitted for tax purposes, irrespective of IFRS conversion. As a result, Congress and the Obama Administration are considering a repeal of LIFO, while taxpayers and practitioners are defending the merits of LIFO as sound tax policy and are seeking an administrative exception to the LIFO conformity requirement. The transition from LIFO to an alternate inventory method will have...
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...The End of LIFO Jordan Stepney 9910 Pineville Rd Apt 205 Raleigh, NC 27617 Jordanjay15@yahoo.com 919-770-0972 ACCT525 Current Acct Issues Professor Sharon Brown 08/14/2016 Introduction An interesting topic that I chose is LIFO accounting. LIFO stands for last in and first out. LIFO is a valuation method of inventory. The other valuation methods of inventory is FIFO, which stands for first in and first out and weighted average. FIFO is a popular valuation method along with LIFO. LIFO has its advantages and disadvantages. The advantages of LIFO is that current product is measure along with its current revenues. The current market prices are matched up with current revenues. As for FIFO the older costs is matched with the recent revenues, which understates the profit. As for the LIFO it’s a great measurement of current profit and it understates the cost of goods sold, which more of a profit is created. History LIFO is the valuation of inventory. Well the word inventory deprived from England. LIFO was the first inventory valuation method to be used. The idea of LIFO was to match up current costs with the current revenues. In 1918 LIFO was first discussed in The Revenue Act during World War I. America discussed that LIFO shouldn’t be change and should remained the same as England described LIFO. In the early 1930’s the LIFO talk started to progress. In 1936 Board of Directors of American Petroleum Institute recommended that companies should use the...
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...FIFO and LIFO Accounting Implications of Valuing Inventory under FIFO and LIFO Laura Lance Financial Accounting, ACC211 Instructor Suzanne Lozano 8 December 2011 FIFO and LIFO 1 Accounting Implications of Valuing Inventory under FIFO and LIFO LIFO and FIFO Inventory Accounting Methods The two most common methods of inventory accounting are Last-in-first-out (LIFO), and first-in –first out (FIFO), choosing the correct method of inventory accounting could be detrimental to the income statement and the statement of cash flow, and also it would affect the balance sheet of the company. For a company, it is imperative that they track their inventories and cost of goods sold. Both of these methods of accounting are a way they could do this. LIFO and FIFO are methods used for accounting for the inventory. I will discuss these two different methods. FIFO FIFO is a method that companies use whose inventories are like food or an item that could turn bad if not sold quickly. A company using FIFO normally looks better to investors then they are. It is sort of a false advertisement of higher profit then it should be reflecting. The good part of a FIFO method is that it reflects new purchases and with that would show accurate replacement costs. LIFO LIFO is a method that companies would use if their inventories were not perishable or had a wear out date. If and when cost of the items rise, the higher...
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...3217 DECEMBER 9, 2008 WILLIAM E. BRUNS SHARON M. BRUNS SUSAN HARMELING Merrimack Tractors and Mowers, Inc.: LIFO or FIFO? Ricardo “Rick” Martino, president and chief operating officer of Merrimack Tractors and Mowers, Inc., of Nashua, New Hampshire, felt that his job had grown much more complicated during 2007 and 2008. Merrimack was a major regional manufacturer and seller of large commercial grass mowers based on a design developed by his grandfather in the years after World War II. The company’s major competitors were John Deere, The Toro Company, Simplicity, and Husqvarna—much older and larger corporations with extensive lines of lawn care and maintenance equipment. Originally, Merrimack mowers were manufactured and assembled in a workshop and factory in Nashua. However, by 2008 the company was buying all of its tractors and machines, manufactured to its specifications, from a contract manufacturer in China, and it was operating almost exclusively as a machine-and-parts designer and distributor. The company had incorporated in 1980, and an initial public offering was followed by additional offerings of shares over the next decade. By 2008 the company had about 4,000 shareholders, including some mutual funds. About 25% of the outstanding stock was held by members of the Martino family, and shares were traded on NASDAQ. Rick had been elected president after the death of his father late in 1995. Martino’s father had initiated several changes and made decisions that led...
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...for valuation of inventories in 1930 by the Supreme Court. This was after issues with many companies seeing LIFO as the most accurate way to valuate their inventories, which caused many law suites and lead to the final decision by the Supreme Courts. Due to people such as George R. Husband who saw LIFO as a “manipulation of income rather than ‘truth’,” it was difficult for companies to prove that the method should be recognized for its advantages to stockholders. There is also the issue that LIFO can be used to lower taxes substantially and that fact alone made many very suspicious of businesses wish to implement the acceptance of LIFO. Though there are many opposing the use of this method, there are many reasons it should be accepted. The “Conformity Rule” was developed as a constraint for LIFO after much debate and demand, so that companies could be regulated. Basically it requires companies to use LIFO across all of its financials so that they are not just using the method to lower their taxes. So instead of just using it for valuation of inventory, it is also used to calculate net income. Though many were fighting very hard to keep LIFO out of GAAP, others were having a very different argument and that’s how LIFO came into use. LIFO had the former SEC Chairman on its side which seemed to have an effect on its credibility. Though Husband looked at users of LIFO as manipulators of their financial statements, Harold Williams saw it as the most accurate and proper way to...
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...FIFO values closing stock at the latest price which is high and hence the profit gets overstated as the cost of goods sold gets reduced. * Higher income taxes may have to be paid as FIFO results in profits being inflated. * Manufacturing firms do not issue raw materials at the latest prices and hence it forms a barrier to setting realistic price for the final product. * Identical inventory is issued to production at a different price simply because they are deemed to be made out of different batches of production. This makes the calculation of unit cost difficult as it varies for different batches of production. | 4 LIFO [ LAST IN FIRST OUT ] | ADVANTAGES | DISADVANTAGES | * The inventory is issued to production at the most recent prices paid to acquire them. * The profit is usually understated in LIFO which causes to impose a lower amount of tax on the profit. * Raw materials are issued to production on the latest prices in a manufacturing firm. * Inventory is issued to production at the price actually paid purchase them. | * The method is unrealistic as...
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...LIFO to be accepted as costing method? I. Introduction In the United States, the SEC is expected to eventually mandate the adoption of International Financial Reporting Standards (IFRS). U.S. standards setters have been working toward this eventuality through a process of convergence. The SEC issued a statement in early 2010 that updated its timeline and indicated that companies could be required to adopt IFRS as early as 2015 (see SEC, "Commission Statement in Support of Convergence and Global Accounting Standards," Release Nos. 33-9109; 34-61578, February 24, 2010, at www.sec.gov/nles/other/2010/33-9109.pdf). The SEC plans to revisit the issue this year. The general consensus suggests, however, that under IFRS, the last-in, first-out (LIFO) inventory valuation method will no longer be permitted for financial or tax reporting. The adoption of IFRS is a contentious issue for companies currently using LIFO as an inventory valuation method. In order to claim the tax benefits of LIFO, companies must also present financial statements using the same method, as required by the conformity rule (IRC section 472 [c]). LIFO is not permitted under IFRS, which means U.S. companies must switch from LIFO to first-in, first-out (FIFO) or average cost upon adoption of IFRS. Although only a small subset of U.S. companies currently uses LIFO for at least some of their operations, a change in inventory valuation method can have a significant impact on reported income, inventory balances, tax...
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...Impact of LIFO Accounting When discussing IFRS vs. GAAP regarding inventory, LIFO Accounting is one of the most controversial topics. Although LIFO is hardly used globally, it is heavily used in the United States. A shift from LIFO would have a significant effect on US companies specifically because tax law requires any company that uses LIFO for tax purposes to also use it for book accounting according to Internal Revenue Code (IRC) §472(c). Since IFRS disallows LIFO Accounting, US companies will either be in non-compliance with US tax code or accounting standards according to IFRS. By disallowing LIFO Accounting, US companies will not only have larger tax liabilities because of accelerated income recognition but they must also account for a change in inventory methods (Bloom & Cenker, 2009). GAAP provides guidance under Statement 154- Accounting Changes and Errors Corrections which states when a change in inventory method occurs; the company must retrospectively apply the change to prior financial statements presented in effected annual reports. Only if change is unfeasible can the company apply the new principle prospectively. When an inventory method change is made, the company can deduct the change for tax purposes. According to IRC §481(a), the company can deduct the entire change in the year of the change if the change is favorable to the entity. However if they change is unfavorable, the company can apply the change of a period of four years starting with the...
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...IFRS vs GAAP: Concerns about LIFO General accepted accounting principles (GAAP) allows the use of LIFO (Last-in First-out) under ASC 330-10-30-9 to determine inventory costs. However, IFRS (International Financial Reporting Standards) does not allow the use. Many companies choose to use the LIFO method because it allows the higher value inventory to be included into the cost of sales. This results in a smaller profit margin that further results in less tax. IFRS doesn’t allow the use of LIFO for the same reason. The financial statements will be less true to the current market value. In the efforts to converge with international standards, LIFO has become a major issue. First it must Although GAAP currently allows the use of LIFO, entities must still abide to the Sec. 472(c) – LIFO conformity rule – in which the same inventory cost method must be used on financial statements and on income tax returns. This can be a problem for multinational companies since LIFO is not allowed under IFRS. Multinational businesses would need to provide reporting information that follows both GAAP and IFRS. This could be a very costly process. What would happen if LIFO were no longer allowed? This is an even more important issue among many companies since it is estimated that about 36% of U.S. companies use LIFO (“Georgia Tech Financial Analysis Lab Releases LIFO Study,”IFRS.com). In the a study performed by Georgia Tech, they found that out of 30 sample companies, they estimated “that the...
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...sold out later. Recently-placed goods that are unsold remain in the inventory at the end of the year. With this inventory valuation approach, the company accounts for the value of inventory received first when sales are made. One of the more common reasons a company chooses FIFO is because it is a more natural straight-line approach since account for the first inventory in as the first items sold. This makes it especially useful when tracking inventory items is simple LIFO, which is stands for “last-in-first-out”, is an inventory valuation method assumes that the last inventories bought are the first one to be sold, and the inventories bought first are sold out last. The goods placed first in the inventory remain in the inventory at the end of the year. Thus, when the accounting in most recently received inventory with first items sold. This actually gives a more realistic look at the market costs of the inventory when sell since it is sold shortly after received. A main reason companies choose LIFO during periods of inflation, though, is that it helps keep current taxable income low since more recent purchases typically have a higher cost basis The weighted average method uses average costs over the reporting period to calculate the inventory balance. It is a new average cost is calculated after each purchase, then is used to value all subsequent issue and balances. Therefore it shows average cost of issues and average closing stock value as compared to FIFO and...
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...affected by the increased in cost in Asia. The income of Merrimack of 2008 was below that of 2007 and earlier years and there was a pressure on Rick Martino to keep earning growing. Company's controller had idea to maintain the trend in income growth by changing the method of accounting for inventories of Tractors, mowers and parts. The controller suggested Rick to change the accounting method from LIFO to FIFO which would report to higher income figure in 2008 which subsequently would increase the taxes payable. Inference: After comparing income statements of year 2008 based on LIFO and FIFO methods we can observe a drastic impact it had on NET INCOME. NETINCOME is positive when FIFO method is used and negative when LIFO is used. • As per Colburn’s report,...
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...study LIFO or FIFO Submission Date Sep-9-2015 Class: Accounting Submitted by 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...
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...Is LIFO Fair? Scott Olson/Getty Images Exxon Mobil Corporation, like many U.S. companies, uses LIFO to value its inventory for financial reporting and tax purposes. In one recent year, this resulted in a cost of goods sold figure that was $5.6 billion higher than under FIFO. By increasing cost of goods sold, Exxon Mobil reduces net income, which reduces taxes. Critics say that LIFO provides an unfair “tax dodge.” As Congress looks for more sources of tax revenue, some lawmakers favor the elimination of LIFO. Supporters of LIFO argue that the method is conceptually sound because it matches current costs with current revenues. In addition, they point out that this matching provides protection against inflation. International accounting standards do not allow the use of LIFO. Because of this, the net income of foreign oil companies such as BP and Royal Dutch Shell are not directly comparable to U.S. companies, which makes analysis difficult. What are the arguments for and against the use of LIFO? Answer: Proponents of LIFO argue that it is conceptually superior because it matches the most recent cost with the most recent selling price. Critics contend that it artificially understates the company's net income and consequently reduces tax payments. Also, because most foreign companies are not allowed to use LIFO, its use by U.S. companies reduces the ability of investors to compare results across companies. Source: David Reilly, “Big Oil's Accounting...
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...1. Suppose that some application requires using two stacks whose elements are of the same type. A natural storage structure of such a two-stack data type would consist of two arrays and two top pointers. Explain why this may not be a space wise efficient implementation. A stack is a last in first out (LIFO) data type. A stack can be implemented using arrays where the data is stored in continuous memory locations. We have two operations in a stack push and pop. Since it has continuous memory allocated, if we try inserting data it gets saved in that free space present in either of the stacks. This is not a space wise efficient implementation because data is stored statically. In this case one stack can be full while the other is empty. 2. Using the basic queue and stack operations, write an algorithm to reverse the elements in a queue. Create an empty stack While the queue is not empty Remove a value from the queue and push it onto the stack While the stack is not empty Pop a value from the stack and add it to the queue. 3. Assume that 'Stack' is the class described in this section with 'StackType' set to into and STACK_CAPACITY or myCapacity set to 5. Give the value of 'myTop' and the contents of the array referred to by 'myArray' in the Stack s afer the code segment is executed, or indicate why an error occurs. Stack s; s.push(1); s.push(2); s.push(3); s.pop(); s.push(4); s.push(5); s.pop(); s.pop(); In a stack it is last...
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