Question

Suppose you are the controller of a manufacturing company that currently used the FIFO method of accounting for inventory. Also, suppose the economy is currently experiencing a period of high inflation. Although profits are higher this year than last year, you realize that the cost to replace inventory is also higher. You are considering changing accounting methods from FIFO to LIFO. What factors should you consider before making a change?

Answer 1

First of all, We need to check whether law of that country allows you to change method of Valuation of inventory from FIFO to LIFO as it would result in decrease in profit. If yes, there must be some reporting requirements, we need to adhere all that reporting requirements.

Disclosure of Accounting Policies and principals requires if there is any change in accounting policy and procedure during the year, we need to re-instate last year Profit & Loss account and Balance Sheet or say that Particular item to show the effect of that change. We need to seperately report the effect of that change in amount i.e. we need to calculate the effect of that change.

Tax Authorities may raise issue as changing of method would result in decrease of profit therefore decrease in collection of Tax Amount. Rules and regulation with respect to taxation in case of change in method needs to be checked. If that supports this change, we can adopt new valuation Method.