...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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...of information manipulation and influence. In section one and section two respectively I will talk about differences in cost flow assumptions and inventory valuation under both methods. I. COST FLOW ASSUMPTIONS Companies typically purchase merchandise at several different prices. Ending inventory equals the quantity on hand multiply the unit acquisition price. If a company use historical cost to determine the cost of inventory and it purchases inventory at different unit prices, it needs to make an arbitrary choice as to the assumed unit price, because a specific identification of the given items sold and unsold proves both expensive and impossible to achieve. Three major assumptions are First-in, first-out (FIFO), last-in, first-out (LIFO) and weighted average cost. Although the attribute being calculated is historical cost in all methods, the result is arbitrary...
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...Learning Team Deliverable Team D The advantages of last-in first-out (LIFO) method consist of four different components. The first advantage of LIFO is recent cost against current revenues. This is advantage because the inventory cost will matched the physical cost of the replacement inventory without inflation to drive up the cost. The LIFO reduced the inventory profits by matching the recent costs against revenues. This will help in eliminating cost of goods sold to be understated and profit to be overstated. The second advantage of LIFO is tax benefits and improvement in cash flows. The advantage of inventory being purchase at the higher cost is matched to the revenues of the period. This will result in the profit being properly stated for tax purpose. This will cause a reduce in the tax bill and result in helping to improve the cash flow of the company. The third advantage of LIFO is minimizing write down inventory to market cost. The advantage of the inventory being purchased would not be affected by future price increase. By using this LIFO method the inventory is usually purchased at the higher price and sold at the higher prices first. The result of using LIFO minimized the need to write down prices due to future price hikes. The fourth advantage of LIFO is physical flow of inventory. The advantage is important in most situations because of the physical inventory received by the company. The company tracks of the inventory that is received last in...
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...AN EXAMINATION OF INVENTORY COSTING CONVERGENCE UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND INTERNATIONAL FINANCIAL REPORTING STANDARDS Casey Reineking Department of Accounting Murray State University Murray, KY 42071-3314 E-mail: casey.reineking@hotmail.com Don H. Chamberlain Department of Accounting Murray State University Murray, KY 42071-3314 Holly R. Rudolph Department of Accounting Murray State University Murray, KY 42071-3314 L. Murphy Smith* Department of Accounting Murray State University 351 Business Building Murray, KY 42071-3314 Tel: 270-809-4297 Email: msmith93@murraystate.edu *Corresponding author Forthcoming in Journal of International Business Research AN EXAMINATION OF INVENTORY COSTING CONVERGENCE UNDER GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND INTERNATIONAL FINANCIAL REPORTING STANDARDS ABSTRACT Accounting principles in the United States are converging toward international standards. If convergence continues, and there are proponents and detractors, then the U.S. system of accounting, called Generally Accepted Accounting Principles (GAAP), will eventually be replaced by International Financial Reporting Standards (IFRS). Convergence has profound implications for publicly traded companies and their many stakeholders such as investors, lenders, government agencies, and employees. A key issue facing accounting standard-setters is the treatment of inventory costing, an area in which GAAP and IFRS differ. This study addresses three...
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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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...– Task 4 There are several methods that a company can use to calculate the value of the goods in inventory. By reporting and analyzing such information, a company can help to predict financial performance and the best plan to achieve results. Such inventory valuation methods include: Average Cost Method; FIFO; and LIFO. The inventory valuation methods use two different inventory systems – perpetual and periodic. The perpetual inventory system is used when a company reports the cost of goods sold as those goods are sold throughout the accounting period. The periodic inventory system is used when a company reports the cost of goods sold as a residual at the end of the accounting period. Average Cost Average Cost method is defined as “an inventory plan that prices items in the inventory on the basis of the average cost of all similar goods available during the accounting period.” The benefits of Average Cost include: · Simple to calculate and analyze results · Not subject to income manipulation · Useful when dealing with similar inventory items Average Cost method will result in the gross profit and net income in the middle of the FIFO method and LIFO method results. In cases where the Average Cost method is used, the inventory valuation and cost of goods sold will be have different results if the perpetual or periodic inventory system is used. The “Inventory Template” computed the value of the Periodic Average Cost. The value of the inventory using the Periodic...
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...management to consider the framework if no explicit standard exists on an issue. Present different objectives for business and non-business financial statement reporting Have one objective for both. of Place more emphasis on the going concern assumption. Relevance, reliability, comparability and understandability are the primary characteristics. (1)List income and expenses as the elements related to performance. (2)Define it as a resource from which a future economic benefit is expected. (3)Use “probable” to define the criteria for recognition. Financial statements elements (1)List revenues, expenses, gains, losses and comprehensive income as the elements related to performance. (2)Define an asset as a future economic benefit. (3)Use “probable” to define assets and liabilities. (4)Don’t allow the values of most assets to be adjusted upward. Figure 2: Differences in 会计事项 会计事项 US GAAP 强制性规定 选择性规定 Balance Sheet Marketable Investment Securities Classified as held-to-maturity, trading and available-for-sale. LIFO, FIFO and the average cost method. Inventory Once an inventory write-down occurs, any subsequent recovery of value is ignored. Subsequent recovery of value can be included. Trading securities are known as held-for-trading securities. FIFO and the average cost method. IFRS 强制性规定 选择性规定 Case 1 Property and Equipment Don’t permit upward revaluations. Permit upward revaluations. Property and equipment are reported at fair value at the revaluation date...
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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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...ExxonMobil Analysis Metra Walthour American Public University System ExxonMobil is an American established gas and oil firm that has a head office in the metropolis of Irving, Texas. Even though it is American established and holds its head office in Texas, it is additionally a multinational firm that is recognized and utilized worldwide. The Exxon Firm was instituted in the year of 1934 across the mergence of the Average Oil Firm of New Jersey and the Anglo-American Oil Company. Even though these two firms joined in 1934, the name and company of Exxon did not come about until 1972. Exxon Mobil was instituted afterward, in 1999, alongside the mergence of Exxon and Mobil. ExxonMobil is an extremely prosperous firm, generally because “it is the third biggest firm by revenue and the subsequent biggest openly traded firm by marketplace backing in the world.” (Nagurney, 2010) An example of how big and successful ExxonMobil is, is lead by its largest shareholder, which happens to be the Bill and Melinda Gates Foundation. “The company is ranked No. 5 globally in 2013. ExxonMobil’s reserves were 72 billion BOE (barrels of oil equivalent) at the end of 2007 and, at then rates of production, were expected to last over 14 years. With 37 oil refineries in 21 countries constituting a combined daily refining capacity of 6.3 million barrels, ExxonMobil is the largest refiner in the world, a title that was also associated with Standard Oil...
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...Solution of the Case: a) If a company uses LIFO, the value of closing stock will be lesser than the value calculated under FIFO method and the closing stock will be lesser in LIFO due to the higher cost of sales which in turn would result in lesser gross profit. This is transferred to Profit & Loss Account/Income Statement/Statement of Financial Performance which in turn would result in lesser net profit & high tax savings as tax would be levied on lesser Net Profit. Here Golf Challenge Corp. can use FIFO method to comply with the loan financing requirements and also because in FIFO method Net profit margin & current ratio would be higher as compared to LIFO method. LIFO usually produces higher cost of goods sold than does FIFO because more recently purchased goods (usually higher priced) are assumed sold first. Net Profit Margin= Net Profit after Tax (In FIFO Net profit would be more due to value in Sales Revenue higher closing stock which result in higher net profit, For publicly traded companies on the S& P 500, the Average net profit margin is 8.5 percent) Current Ratio=Current Assets (Higher Closing stock value is included in current assets, Current Liabilities generally ratio should be higher than 1.33:1 as per Industry ...
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...at the end of the period. Accountants must also consider the issue of valuing of inventory. This is an issue because records must be kept consistent when recording inventory so that it is fairly valued in accordance with the accounting method chosen such as, FIFO, LIFO, or weighted average method to determine the value of inventory. The inventory method chosen can results in different amounts for the cost of goods sold. Inventory detail can be an issue as it must be accurate related to FIFO and LIFO so when selling units the correct per price point is used for each method. Shrinkage costs can be an issue if the difference in current inventory costs are drastically different from the physical count. A drastic difference means there is high human error or theft of inventory. Determining which method will affect the income of a company and the taxes a company has to pay can be an issue depending on the company. If a company is trying to pay lower income taxes, the method chosen is directly related to the economic environment. Lower of cost or market is also an issue accountants must consider since inventory cannot be recorded higher than the probable economic future benefit. It is an issue because the probable future economic benefit is an estimate value of the revenues the inventory can provide and new products entering the market can greatly reduce that value just by entering the market.Discuss the questions the...
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...TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1, 2, 3, 5 1. Inventory accounts; 1, 2, 3, 4, determining quantities, 5, 6, 8, 9 costs, and items to be included in inventory; the inventory equation; balance sheet disclosure. 1, 3 1, 2, 3, 4, 5, 6 1, 2, 3 2. Perpetual vs. periodic. 2 9, 13, 17, 20 4, 5, 6 3. Recording of discounts. 10, 11 7, 8 3 4. Inventory errors. 7 4 5, 10, 11, 12 2 5. Flow assumptions. 12, 13, 16, 18, 20 5, 6, 7 9, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22 1, 4, 5, 6, 7 5, 6, 7, 8, 11 6. Inventory accounting changes. 18 7 6, 7, 10 7. Dollar-value LIFO methods. 22, 23, 24, 25, 26 1, 8, 9, 10, 11 8, 9 Copyright © 2013 John Wiley & Sons, Inc. 14, 15, 17, 18, 19 8, 9 Kieso, Intermediate Accounting, 15/e, Solutions Manual 4 (For Instructor Use Only) 8-1 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Identify major classifications of inventory. 1 1 2. Distinguish between perpetual and periodic inventory systems. 3 2 4, 9, 13, 17 4, 5, 6 3. Determine the goods included in inventory and the effects of inventory errors on the financial statements. 4, 5, 6, 7 4 5, 10, 11, 12 2 CA8-3, CA8-5 ...
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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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...errors. Flow assumptions. 10, 11 7 12, 13, 16, 18, 20 4 5, 6, 7 Questions 1, 2, 3, 4, 5, 6, 8, 9 Brief Exercises 1, 3 Exercises 1, 2, 3, 4, 5, 6, 10 Problems 1, 2, 3 Concepts for Analysis 1, 2, 3, 5, 11 2. 3. 4. 5. 2 9, 13, 14, 17 7, 8 2, 3, 4, 5, 10, 11, 12 13, 14, 15, 16, 17, 18, 19, 20, 21, 22 18 4, 5, 6 3 2 1, 4, 5, 6, 7 5, 6, 7, 8 4 6. 7. Inventory accounting changes. Dollar-value LIFO methods. 14, 15, 17, 18, 19 8, 9 7 1, 8, 9, 10, 11 6, 7, 10 8, 9 23, 24, 25, 26 8-1 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives 1. 2. 3. 4. 5. Identify major classifications of inventory. Distinguish between perpetual and periodic inventory systems. Identify the effects of inventory errors on the financial statements. Understand the items to include as inventory cost. Describe and compare the cost flow assumptions used to account for inventories. Explain the significance and use of a LIFO reserve. Understand the effect of LIFO liquidations. Explain the dollar-value LIFO method. Identify the major advantages and disadvantages of LIFO. Understand why companies select given inventory methods. 8, 9 22, 23, 24, 25, 26 1, 8, 9, 10, 11 Brief Exercises 1 2 4 1, 3 5, 6, 7 4, 9, 13, 16, 17, 18, 20 5, 10, 11, 12 1, 2, 3, 4, 5, 6, 7, 8 13, 14, 15, 16, 17, 18, 19, 20, 22 21 1, 2, 3 1, 4, 5, 6, 7 4, 5, 6 Exercises Problems 6. 7. 8. 9. 10. 8-2 ASSIGNMENT CHARACTERISTICS TABLE Level of Difficulty Moderate Moderate Simple Simple Moderate...
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...--Future value of annuity due = (1+r) * P(((1+r)^n - 1)/r) --Bonds: Dr. Cash, Cr. Discount, Cr. Bonds Payable (par value) First entry for first payment of interest: Dr. Interest Expense, Cr. Cash, Cr. Discount on bonds payable --Cash: coin, currency, available funds on deposit at bank, money order, certified checks, cashier’s checks, personal checks, bank drafts, and saving accounts. Inclunding Cash equivalents: T-bill, commercial paper, money mkt funds. Restricted: plant expansion, retirement of long term debt, compensating balances. Cash equivalents are short-term, highly liquid investments that are both (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates --Reconciliation: bank: add: deposit transit, deduct: outstanding checks, Book: add: collections not recorded, deduct: book charges not recorded (example!!!!!) --Net realizable value: A/R-AFDA ---Dr. Bad debt exp Cr. AFDA --Write off: Dr. AFDA Cr. A/R Recovery: Dr.A/R Cr.AFDA, Dr. Cash CrA/R --A/R Turnover: evaluate liquidity of A/R, measure the number of time on avg a company collect A/R, Net sales/avg trade receivables --direct write off: no matching, receivable not stated at cash realizable value, not GAAP --allowance method: % of sales, % of receivables, GAAP requires % of sales: better matching of exp and rev, any balance in AFDA is ignored % of receivables: not matching...
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