Question

You have just been hired as a consultant to Tangier Industries, a newly formed company. The company president, John Meeks, is seeking your advice as to the appropriate inventory method Tangier should use to value its inventory and cost of goods sold. Mr. Meeks has narrowed the choice to LIFO and FIFO. He has heard that LIFO might be better for tax purposes, but FIFO has certain advantages for financial reporting to investors and creditors. You have been told that the company will be profitable in its first year and for the foreseeable future. Prepare a report for the president describing the factors that should be considered by Tangier in choosing between LIFO and FIFO

Answer 1

SOLUTION

For selecting an accounting method for inventory valuation, the company should consider their goals and the options they have for the inventory valuation because the method which would be choosed would have a straight impact on the company financial statements

Factors that should consider by tangier in chossing between LIFO and FIFO.

It is an assumption that FIFO (FIRST IN FIRST OUT) is an oldest method of inventory calculation.

If we talk about internal reporting FIFO is known as a good choice because while using FIFO costs of good remain stable as cost of inventory still in stock usually shows current pricing with accuracy and in the case of LIFO unusual increases or decreases may occur when older inventory is accesed because older cost remains in books for years.

In the case of financial reporting the as per the GAAP and IFRS only FIFO is allowed is allowed the IRS allows the use of both LIFO and FIFO.And in case if you are using FIFO you will only have to value your inventory once.If you want to use LIFO for tax purposes, you will have to value your inventory twice.

Inventory valuation - FIFO is better indicator for the value of the ending inventory because the older items are used up while the newer items shows current market price.LIFO uses the most recently acquired items for COGS and the inventory left might be old or obsolete thus LIFO does not provide an accurate value of inventory because inventory valuation is lower than today current price.

In case of tax burden if we use LIFO it result in higher COGS( assuming price are rising) the the income will reduced so does the tax liability but in the case of FIFO it shows lower COGS and increased income which shows higher prices and high tax So here LIFO is good option to consider because tax burden is falling for goods whose prices are increasing.