Question

International Financial Reporting Standards (IFRS) do not permit companies to use the LIFO method for inventory accounting. In its form 20-F, CNH discloses that it uses the first-in-first-out (FIFO) method to accounting for its inventory. Assume that prices that Caterpillar and CNH pay for inventory typically increase over time. In general terms, how does each company’s inventory accounting method affect its balance sheet and income statement? How would the choice between LIFO and FIFO affect the statement of cash flows, if at all? What if prices typically decrease over time?

Answer 1

	FIFO METHOD OF VALUATION	LIFO
CLOSING INVENTORY VALUED AT	EARLIER PURCHASES MADE	LATEST PURCHASE MADE
	INVENTORY WOULD REPRESENT THE LATESTS STOCK	INVENTORY WOULD REPRESENT THE OLDEST STOCK
SALES	ASSUMING GOODS PURCHASED FIRST ARE SOLD FIRST AND LATEST PURCHASES LEFT AT THE END OF THE YEAR ARE KEPT IN STOCK AS INVENTORY	ASSUMING LATEST GOODS PURCHASED ARE SOLD FIRST AND EARLIER PURCHASES ARE KEPT IN STOCK AS INVENTORY
IN CASE OF INCREASE IN PURCHASE PRICE	UNSOLD INVENTORY WILL BE VALUED AT LOWER PRICE	UNSOLD INVENTORY WILL BE VALUED AT CURRENT PRICE MADE FROM LATEST PURCHASES
IMPACT ON INCOME STATEMENT	THERE WOULD BE INCREASE IN NET INCOME DUE TO HIGHER VALUATION OF INVENTORY	THERE WOULD BE DECREASE IN NET INCOME DUE TO LOWER VALUATION OF INVENTORY
IMPACT ON BALANCE SHEET	THIS WILL LEAD TO INCREASE IN CURRENT ASSETS	THIS WILL LEAD TO DECREASE IN CURRENT ASSETS
IMPACT ON CASH FLOW	THIS WILL LEAD TO INCREASE IN CASH	THIS WILL LEAD TO DECREASE IN CASH
IN CASE OF DECREASE IN PURCHASE PRICE
IMPACT ON INCOME STATEMENT	THERE WOULD BE DECREASE IN NET INCOME DUE TO LOWER VALUATION OF INVENTORY	THERE WOULD BE INCREASE IN NET INCOME DUE TO HIGHER VALUATION OF INVENTORY
IMPACT ON BALANCE SHEET	THIS WILL LEAD TO DECREASE IN CURRENT ASSETS	THIS WILL LEAD TO INCREASE IN CURRENT ASSETS
IMPACT ON CASH FLOW	THIS WILL LEAD TO DECREASE IN CASH	THIS WILL LEAD TO INCREASE IN CASH