Question

During 2015, Crop-Paper-Scissors, a craft store, began operations and chose to use the FIFO inventory costing method.

After creating their financial statements for 2015, the company realized that it would prefer to use the LIFO inventory costing method instead.

So, Crop-Paper-Scissors switched to the LIFO method in 2016.

Due to a change in the economy, the company realized that it would, in fact, be better for them to use the FIFO method.

So, in 2017 they switch back to FIFO. After analyzing the swing in the numbers over the past few years, they decide to smooth things out a bit by trying average costing in 2018.

1. What impact(s) will these actions have on the company’s financial statements? Be sure to discuss the balance sheet and the income statement separately, and be specific about the impacts on each statement (i.e. overstatement/understatement of account balances and net income).

2. How does FIFO impact the balance sheet? The income statement?

3. How does LIFO impact the balance sheet? The income statement?

4. What are the advantages of switching inventory methods (i.e. why is Crop-Paper-Scissors doing this)?

5. Discuss the role that accounting should play in this situation. Which GAAP principle(s) are being violated?

6. Discuss the ethical issues in this case (be sure to identify each party involved and whether or not they are acting in an ethical manner). Identify who could be harmed and how they could be harmed (be specific). Do not include the individuals at Crop-Paper-Scissors who made the decision, created the financial statements, or filed the taxes. As a personal friend, what advice would you give to the accountant who works for Crop-Paper-Scissors?

Answer 1

Answer :-

• FIFO and LIFO are two distinct strategies for stock valuation which an organization can receive to esteem its inventories.
• The strategies embraced by the organization must be reliably from year to year.

1) :-

• In the given case,the organization continued changing the strategy from year to year.
• Conflicting valuation of stock can give deluding data to the financial specialists accordingly influencing the validity of the organization.
• Changing from FIFO to LIFO technique can result in modest representation of the truth/overhead of the year end benefits relying upon the stock costs.
• The salary articulation can demonstrate a pattern of conflicting net livelihoods and correlation of various year's net wage moves toward becoming pointless.
• The clients of the money related explanation like the speculators ,depend on the accounting report to settle on their contributing choices, When the organization pursues a conflicting technique to esteem its stock, It without a doubt delineates in its asset report.

2 ) :-

• Under FIFO strategy, the end stock is esteemed according to the rate in the last part purchased.
• When the last buy was the last buy was amid a pinnacle time, the costs paid for the last parcel of inventories will be high and the organization will esteem its stock dependent on this pinnacle value which as a result will support up the net wage and bad habit versa.
• So, in the wage explanation, this will demonstrate a high net pay and to be decided sheet the investor's will expect a higher return on the grounds that opf high benefits.

3) :-

• Under toward the end in first out (LIFO) strategy . the organization esteems its stock based on the principal part of stock bought. like a similar instance of LIFO technique.
• It can help up or edit down the benefits as per the cost of the stock winning at that of time.
• In the salary articulation, the net pay can be high or low and to be decided sheet, the speculator choice could be influenced because of this

4) :-

• Exchanging of stock valuation differ normality isn't at all prudent as it can prompt conflicting money related data.
• In any case, , now and again , exchanging of the strategy for stock valuation can give the accompanying advantages:-
• Better introduction of financials according to the most recent bookkeeping systems.
• To consent to any law or statue.

5) :-

• The bookkeeper should demand the administration to pursue predictable strategy to esteem its inventories.
• Inaccurate valuation makes the money related data be un-practically identical and deluding for the financial specialists.
• The GAAP that is being disregarded is 'consistency' which says that a substance ought to reliably pursue the bookkeeping approaches starting with one year then onto the next year.

6) :-

Moral issues included:- deluding data to the financial specialists parties included: administration:-

• The administration can be included to demonstrate a superior net wage with the end goal to pull in the speculators. financial specialists:-
• Speculators may be influenced because of their off base choices. encourage to the bookkeeper: dependably endeavor to stick on to one stock valuation strategy and request that the administration not change the stock valuation technique occasionally.