Graded Discussion Board
Cost and Management Accounting (MGT402)
This is to inform that Graded Discussion Board (GDB) No. 01 will be opened on November 30, 2013 for discussion and last date for posting your discussion will be December 04, 2013.
Topic/Area for Discussion
This Graded Discussion Board will cover first 14 lessons.
The following table reveals that the amount of gross profit and ending inventory can appear quite different, depending on the inventory method selected:
The results above are consistent with a general rule that LIFO produces the lowest income (assuming rising prices, as was evident in the Gonzales example), FIFO the highest, and weighted average an amount in between. Because LIFO tends to depress profits, one may wonder why a company would select this option; the answer is sometimes driven by income tax considerations. Lower income produces a lower tax bill, thus companies will tend to prefer the LIFO choice. Usually, financial accounting methods do not have to conform to methods chosen for tax purposes. However, in the United States, LIFO "conformity rules" generally require that LIFO be used for financial reporting if it is used for tax purposes. In many countries LIFO is not permitted for tax or accounting purposes, and there is discussion about the USA perhaps adopting this global approach.
Accounting theorists may argue that financial statement presentations are enhanced by LIFO because it matches recently incurred costs with the recently generated revenues. Others maintain that FIFO is better because recent costs are reported in inventory on the balance sheet. Whichever method is used, it is important to note that the inventory method must be clearly communicated in the financial statements and related notes. LIFO companies frequently augment their reports with supplemental data about what inventory cost would be if FIFO were used instead. Consistency in method of application should be maintained. This does not mean that changes cannot occur; however, changes should only be made if financial reporting is deemed to be improved.