...Inventory Valuation Methods and Ethical Considerations Gary Varnell Capella University MBA 6014 Financial Accounting Professor Laurent Bobda Introduction Net income results, reported in the financial statement presentation, can be affected by the inventory reporting methods used. First-In, First-Out (FIFO), Last-In, First-Out (LIFO,) and weighted average methods each have their own implications during periods of inflation and deflation. This paper is designed to analyze and discuss the Generally Accepted Accounting Practices (GAAP) and ethical implications of each reporting method in a hypothetical company. For this paper, these discussions will be from the viewpoint of a manager. In this paper, the manager will select an inventory reporting method while taking into consideration the tax liabilities, profit levels, as well as the ethical considerations that the manager will have in choosing a particular inventory reporting method. First-In, First-Out (FIFO) The first-in, first-out method, which is also called FIFO, “assumes that the earliest goods purchased (the first ones) are the first goods sold, and the last goods purchased are left in ending inventory” (Libby, Libby, & Short 2014). When it comes to inventory, this method is best used if the company have inventory with decreasing costs due to the fact that it produces the lowest tax payments for the company. This inventory reporting method, along with cost of goods sold, will be the same whether it is computed in...
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...Inventory Valuation Methods and Ethical Considerations Unit 4 Assignment 3 Dany St. Laurent Capella University Introduction Generally accepted accounting principles (GAAP) are the measurements and disclosure rules used to develop the information in financial statements (Libby, Libby, Short. pg. 16). When reporting inventory, there are generally four inventory reporting methods used; Specific identification method, first-in, first-out method (FIFO), last-in, first out method (LIFO), and average cost method. Each method is in conformity with GAAP and the law. Also each method has their own implications during periods of inflation and deflation. They can also affect the net income results reported in the financial statement presentation. In this paper, I will assume the role of a manager and analyze the GAAP and ethical implications of three of the four reporting methods in a clothing store company. First-In, First-Out Method When FIFO is used, the goods that are purchased first are the first goods to be sold. The goods that are the newest are left in ending inventory. When a company deal with increasing inventory it provides lower cost of goods sold, and a higher income tax liability, but in the end a higher net income is acquired. For inventory with decreasing cost, this is used for both tax return and financial statements because it produces the lowest income tax payment. This is a good method if the companies good have a short shelf live. It allows the company to not...
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...Laureijs; José Adriano Machado Subject: Group 2’s analysis of Managing Earnings by Manipulating Inventory: The Effects of Cost Structure and Valuation Method Introduction In this memo, we intend to analyze and breakdown Managing Earnings by Manipulating Inventory: The Effects of Cost Structure and Valuation Method by Kirsten A. Cook, Ryan Houston & Michael R. Kinney’s major faults and weak-points. The article examines how production cost structure and inventory valuation affect a company’s earning management through inventory manipulation. Its two main findings are the following: i. Firms with high fixed-cost ratios are more likely to manipulate production but make smaller abnormal inventory changes than companies with low fixed-costs ratios; ii. LIFO firms are less likely than other companies to manage earnings by using the production lever (i.e. shifting fixed costs between COGS and inventory) because they may also manage earnings by liquidating LIFO layers and releasing the LIFO reserve. Before we begin our analysis, we put together a brief rundown of the essential concepts the article’s authors go through to form their conclusions. Cost Structure Cost structure refers to the types and relative proportions of fixed and variable costs that a business incurs. Valuation methods A company can value its inventory using several methods. The two most important methods are LIFO (“last in first out”) and FIFO (“first in, first out”). Under FIFO, the cost of goods...
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...Asset Valuation Introduction As consultants for a new retail company, B.A.S.S. Customized Jewelers, our recommendations for reporting and valuing various assets of the business, as well as inventory policy, capitalization policy, and how these policies will help the company succeed are presented here. In this line of business, demonstrations of depreciation method recommendations are critical to show the inventory allocation and asset costs over the life of the inventory. Lastly, an examination of the policies and alternative valuation methods to justify the use of certain methods to use will be determined. This is the beginning process of meeting the future goals of the company and it is the desire of our committee and the company that as the C.E.O. you will find the recommendations viable. Inventory Policy Inventory management practices are varied; the accounting management is similar when it comes to inventory items. In the retail business, the shelves hold inventory until the product is purchased by the consumer. “The inventory account of a firm holds the cost of a product until the cost is released to the income statement to be subtracted from (matched with) the revenue from the sale. The cost of a purchased or manufactured product is recorded as an asset and carried in the asset account until the product is sold (or becomes worthless or is lost or stolen), at which point the cost becomes an expense to be reported in the income statement. The cost of an item purchased...
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... Inventory Valuation Overview Learning Team B Zhra Ghavam, Rochelle Ingram, Chris Staphylaris, and Glorina Tukes QRB/501 31 January 2013 Instructor: David Libhart Inventory Valuation Overview The inventory a company holds often accounts for a significant portion of all assets with a direct correlation to the balance sheet. Inventory includes assets intended for sale, assets in production, and assets that will be used for future production of goods. A company’s ending inventory can be calculated by adding the value of any beginning inventory with net purchases then subtracting the cost of goods sold. The equivalent mathematical representation is: Ending Inventory = Beginning Inventory + Net Purchases - Cost of Goods Sold (Inventory valuation, 2010). While there are numerous industry recognized standards for a valuation of inventory, three of the most common valuation systems include First-In, First-Out – FIFO, Last-In, First-Out – LIFO and Just-In-Time – JIT valuation systems. First-In, First-Out Goods processed or received by an organization are placed in holding as First-In, First-Out; this inventory system is used to track product for use and revenue gained. In the FIFO inventory valuation system, assets or inventory received first are the first ones to be used...
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...giving us the strength and health to let this work see the light and our parents for their help and support. Our Prophet Mohammed said: “Who doesn’t thank people he doesn’t thank Allah”. We want to thank everyone help and participated in making this study starting from our honorable: Mr. Salah Shubair. Who put a lot of faith in our capabilities and encouraged us to complete this study. We thank all of our teachers in the faculty of commerce and our colleagues and friends for their support . III Abstract Abstract The study aims to discuss and evaluate one of the accounting problems, which is choosing proper method for inventory evaluation, that play an important role in the evaluation of businesses financial position and net income. There are many factors affecting the business decision while choosing any of these methods which...
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...several methods that a company can use to calculate the value of the goods in inventory. By reporting and analyzing such information, a company can help to predict financial performance and the best plan to achieve results. Such inventory valuation methods include: Average Cost Method; FIFO; and LIFO. The inventory valuation methods use two different inventory systems – perpetual and periodic. The perpetual inventory system is used when a company reports the cost of goods sold as those goods are sold throughout the accounting period. The periodic inventory system is used when a company reports the cost of goods sold as a residual at the end of the accounting period. Average Cost Average Cost method is defined as “an inventory plan that prices items in the inventory on the basis of the average cost of all similar goods available during the accounting period.” The benefits of Average Cost include: · Simple to calculate and analyze results · Not subject to income manipulation · Useful when dealing with similar inventory items Average Cost method will result in the gross profit and net income in the middle of the FIFO method and LIFO method results. In cases where the Average Cost method is used, the inventory valuation and cost of goods sold will be have different results if the perpetual or periodic inventory system is used. The “Inventory Template” computed the value of the Periodic Average Cost. The value of the inventory using the Periodic Average Cost method is $48...
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...lower cost of inventory on market valuation, interest Capitalizing on building construction, Recording gain or loss on asset disposal and finally the theme adjusting for goodwill impairment Adjusting lower cost in market inventory on valuation Inventories are necessary for companies because it is a fundamental part of the business operation. They seek to retain control of the articles of tangible property of a company. These items range from the material for the production process to be in-assembly and used as part of a sale, must be counted and recorded in the books. The valuation of inventories is of great importance for two reasons. First, generally they constitute an important part of current assets which means that this has a significant impact on working capital. Second, inventory valuation has a major impact as the amount is reported net profit for companies. There are various methods of conducting the inventory and turn the registration ledgers. Generally Accepted Accounting Principles (GAAP) teaches that when inventories decreased in value to future sales price should move in the same direction at the same time There are various methods for carrying the inventory. One is the perpetual method is a continuous record of the inventory items. One of its usefulness is that it allows preparing monthly financial statements, quarterly or provisionally. Another advantage is that you can know the value of the inventory without the need for physical inventories; it gives you...
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...be accepted as costing method? I. Introduction In the United States, the SEC is expected to eventually mandate the adoption of International Financial Reporting Standards (IFRS). U.S. standards setters have been working toward this eventuality through a process of convergence. The SEC issued a statement in early 2010 that updated its timeline and indicated that companies could be required to adopt IFRS as early as 2015 (see SEC, "Commission Statement in Support of Convergence and Global Accounting Standards," Release Nos. 33-9109; 34-61578, February 24, 2010, at www.sec.gov/nles/other/2010/33-9109.pdf). The SEC plans to revisit the issue this year. The general consensus suggests, however, that under IFRS, the last-in, first-out (LIFO) inventory valuation method will no longer be permitted for financial or tax reporting. The adoption of IFRS is a contentious issue for companies currently using LIFO as an inventory valuation method. In order to claim the tax benefits of LIFO, companies must also present financial statements using the same method, as required by the conformity rule (IRC section 472 [c]). LIFO is not permitted under IFRS, which means U.S. companies must switch from LIFO to first-in, first-out (FIFO) or average cost upon adoption of IFRS. Although only a small subset of U.S. companies currently uses LIFO for at least some of their operations, a change in inventory valuation method can have a significant impact on reported income, inventory balances, tax liabilities...
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...AC3225: Week 4 Depreciation Methods and Inventory Valuation Lab 4.1/Inventory Valuation, Depreciation of Assets, and Intangible Assets Solve the problems given below. Click here to download and save the templates that you must use to perform this week’s lab. 1. Remmers Company manufactures desks. Most of the company’s desks are standard models and are sold on the basis of catalog prices. At December 31, 2012, the following finished desks appear in the company’s inventory. Finished Desks 2012 catalog selling price FIFO cost per inventory list 12/31/12 Estimated current cost to manufacture (at December 31, 2012, and early 2013) Sales commissions and estimated other costs of disposal 2013 catalog selling price $500 $540 $900 $1,200 $50 $60 $80 $130 $460 $430 $610 $1,000 $470 $450 $830 $960 A $450 B $480 C $900 D $1,050 The 2012 catalog was in effect through November 2012, and the 2013 catalog is effective as of December 1, 2012. All catalog prices are net of the usual discounts. Generally, the company attempts to obtain a 20% gross profit on selling price and has usually been successful in doing so. Instructions At what amount should each of the four desks appear in the company’s December 31, 2012, inventory, assuming that the company has adopted a lower-of-FIFO-cost-or-market approach for valuation of inventories on an individual-item basis? 1 AC3225: Week 4 Depreciation Methods and Inventory Valuation Lab 4.1/Inventory Valuation, Depreciation of Assets, and Intangible...
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...last in and first out. LIFO is a valuation method of inventory. The other valuation methods of inventory is FIFO, which stands for first in and first out and weighted average. FIFO is a popular valuation method along with LIFO. LIFO has its advantages and disadvantages. The advantages of LIFO is that current product is measure along with its current revenues. The current market prices are matched up with current revenues. As for FIFO the older costs is matched with the recent revenues, which understates the profit. As for the LIFO it’s a great measurement of current profit and it understates the cost of goods sold, which more of a profit is created. History LIFO is the valuation of inventory. Well the word inventory deprived from England. LIFO was the first inventory valuation method to be used. The idea of LIFO was to match up current costs with the current revenues. In 1918 LIFO was first discussed in The Revenue Act during World War I. America discussed that LIFO shouldn’t be change and should remained the same as England described LIFO. In the early 1930’s the LIFO talk started to progress. In 1936 Board of Directors of American Petroleum Institute recommended that companies should use the inventory valuation of LIFO. The board of directors described that LIFO was way to describe the profit of the sales from the actual raw materials. Current Issue The current issue of LIFO accounting is that the valuation method is manipulating. Its manipulating...
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...Your Name DATE: Submission Date SUBJECT: Recommended Inventory Valuation Method Introduction I have calculated the ending inventory for Fan Company A using the four following inventory valuation methods: Periodic FIFO (First In, First Out) Periodic Average Cost Perpetual FIFO Perpetual LIFO (Last In , First Out) to determine which inventory method to recommend to the management of the Company. A summary of my calculations follows. Provide an explanation of your calculations for each of the inventory valuation methods. Finally, your recommendation. Fully explain how your inventory valuation method impacts the Company’s net income and why it is better than the other methods. INCOME EFFECT LIFO | WA | FIFO | Sales | 100,000 | 100,000 | 100,000 | CGAS (Beg Inv. + Purchases) | 74,000 | 72,000 | 70,000 | Ending Inventory | (48,000) earlier cost | (50,000) | (52,000) later cost | CGS | 26,000 later cost | 22,000 | 18,000 earlier cost | Income Effect | 74,000 | 78,000 | 82,000 | Under the FIFO method, the first goods purchased are considered to be the first goods used or sold. Ending inventory is thus made up of the latest (most recent) purchases. Because of this, the FIFO method closely approximates the actual physical flow of merchandise and the cost allocated to ending inventory approximates current cost. Whenever the FIFO method is used, the ending inventory is the same whether a perpetual or periodic system is used...
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...topics: adjusting lower cost of market inventory on valuation, capitalizing interest on building construction, recording gain or loss on asset disposal, and adjusting goodwill for impairment. The Financial Accounting Standard Boards (FASB) established the guidelines and the General Accepted Accounting Principles (GAAP) that should be followed when preparing and evaluating any financial and accounting statements. Adjusting lower cost of market inventory on valuation There are different methods used to evaluate inventory. When evaluating inventory, it is best to pick a method that will work well for the company in which you are evaluating. Inventory are tangible personal property, which are held for sale in the ordinary course of business, are in the process of production for sale, or are to be consumed in the production of goods to be available for sale (Schroeder, Clark, & Cathey, 2005). According to Schroeder, Clark, and Cathey (2005) it is important to valuate inventories for two major reasons. First, inventories generally represent a major section of current assets; therefore, they have a major impact on a company’s working capital and current position. Second, inventory valuation has a major and direct impact on a company’s reported amount of net profit. The amount of inventory recorded on a company’s financial statements represents the acquisition value of an expected cost used to generate future revenues. When evaluating a company’s inventory, it is important to answer the following...
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...principles, methods, practices, and procedures, continue to follow it consistently in future accounting periods. In other words, the readers of a company's financial statements can presume that the same rules and measurements were followed in all of the years being reported. If a change is made to a more preferred accounting method, the effects of the change must be clearly disclosed. . http://www.accountingtools.com/consistency-principle http://www.accountingcoach.com/blog/what-is-consistency-principle Consistency examples: 1. Computer Company X has been using declining balance depreciation method for its computer equipment. The consistency principle states that, once accountants adopt declining balance depreciation method for its computer equipment, it should continue to use in future accounting period. If the company wants change the depreciation method from declining balance method to straight line method, it must show in its financial report, also show the reasons and the effects of the change. http://accountingexplained.com/financial/principles/consistency 2. Computer Company Z has been using First-in-First-out method (FIFO) for valued its own inventory. According to the consistency principle, once accountants adopt First-in-First-out method (FIFO) for valued its own inventory, it must continue to use in future accounting period. If the company wants to change the inventory valuation method from First-in-First-out method (FIFO) to Weighted Averaged method (WAC),...
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...following specific elements: • Adjusting lower cost of market inventory on valuation • Capitalizing interest on building construction • Recording gain or loss on asset disposal • Adjusting goodwill for impairment The details will incorporate the reason behind why the element was established, the impact on financial reporting, current and future implications on the element, we will review each of these elements individually. Adjust lower cost of market inventory on valuation Adjusting lower cost of market inventory on valuation is a requirement of Generally Accepted Accounting Principles in the United States that inventory be recorded a the lower of either the cost to produce it, the cost to repurchase it or the market value of the inventory (www.investopedia). The lower of cost and market method has two boundaries on the valuation of inventories. The first is the inventory ceiling, which requires that inventory must be reported no higher than the net realizable value less expenses. The second boundary is the inventory floor, which required that inventory value be reported at no lower than the net realizable value plus normally attainable profit. The rule of lower of cost or market is intended to provide a means of measuring the residual usefulness of an inventory expenditure. The term market is therefore to be interpreted as indicating utility on the inventory date and may be thought of in terms of the equivalent expenditure which...
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