Often accounting methods are deemed acceptable in either GAAP or IFRS because they most faithfully represent...

Often accounting methods are deemed acceptable in either GAAP or IFRS because they most faithfully represent the underlying transactions that they purport to measure. Sometimes, however, an accounting method is permitted that cannot, upon examination, describe and measure what really happened—such as LIFO in accounting for inventory. If LIFO cannot describe the manner in which goods actually flow through a business, why is it acceptable under US GAAP? How does LIFO provide improved information to the financial statement user, and on which financial statement do we find this improvement?

Expert Solution

LIFO method is the method used to account for inventory that records the most recently produced items as sold first. In LIFO the cost of most recent products purchased are the first to be expended as cost of goods sold.

LIFO is used in United States and is governed by the generally accepted accounting principles and the principal reason for adopting LIFO method was to make it easy for the country to convert to the IFRS system.

Businesses that sell products whose price rises every year are benifited through use of LIFO method . The corporation can cut it's tax expense as by use of LIFO their cost of goods sold will increase resulting in decrease in profit This method not only reduce tax liability but also helps in matching the revenue to the latest cost if price are rising. LIFO method leads to fewer inventory write downs as the inventory is valued on the basis of current scenario so very less difference between cost and fair market value exits. Therefore write down of inventory is usually unnecessary and rarely undertaken. Write down not only effects profitability but also effects asset quality , solvency and financial ratios. So what is presented before users of financial statements is very close to actual position of the business.So it will least effect their financial decisions.Companies with large inventory prefer LIFO method.

Tax laws allow a corporation to value it's inventory on LIFO so a consistency is maintained between data .

Industry like pharmaceutical and supermarkets use LIFO because every good they stock experiences inflation.

ekkarill92 answered 2 years ago

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