Question

Pacific Equipment, which sells industrial handling equipment, values its inventory using LIFO. During the current year, Pacific Equipment has experienced a significant increase in the cost of its inventory items. Although the net income for the current year has been fairly good, Lynne Jamison, the company president, wishes it was higher because the company has been considering borrowing money to purchase a new building. Mrs. Jamison has heard that a company’s choice of inventory valuation method can affect the company’s net income. Mrs. Jamison has asked the controller, Lisa Adams, to explore the possibility of changing the company’s inventory valuation method. If you were in Lisa’s position, how would you respond to Mrs. Jamison? Address potential ethical implications and applicable accounting principles in your answer.

Answer 1

It is true that method of Inventory Valuation has an impact over the Income of the Organization.

Companies following FIFO are charging the cost of material consumption at the older rates , which are generally lesser than the existing rates. By charging Inventory to Profit and Loss account, they book less cost and generate more income .

Moreover , FIFO gives an accurate picture of the transactions of an organization as the price goes increase day by day in general and the same is getting taken care of into the Cost of Goods sold .

In LIFO , since the highest cost of inventory gets consumed into Cost of goods sold, the high cost is charged to Profit and loss account , resulting into lesser income

Companies tries to manipulate their Income and taxes by changing of methods of Inventory.

In fact , as per the US laws, it would be unfair for the Companies to manipulate their incomes and saving taxes by inflating their incomes , LIFO is not acceptable under IFRS also . It has been found by US laws that it would be unfair for the companies to claim Unfair tax breaks and that is why the International Financial Reporting Standards (IFRS ) has banned LIFO.

It has been discussed and debated over the International platforms that the Companies must follow ethics in maintaining their inventory and for the sake of saving taxes on the income, they are not supposed to follow LIFO,.

Hence, as per advise asked to us , we would not suggest the company to indulge into getting into unethical practices .

If we are into the LISAs position ,would not suggest to change the Inventory valuation methods as it would not permitted by IFRS also .