Accounting Questionaire Essay

Accounting Questionaire Essay

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Distinguished:
Identify the main disadvantages of each inventory valuation method.
Since inventory costs affect net income, they have potential tax effects. Companies can use different methods for financial reporting and tax reporting. The only exception is when LIFO is used for tax purposes; IRS requires it be used for financial statements. The consistency principle requires that a company use the same accounting methods period after period (for comparability) unless a change will improve financial reporting. Full-disclosure principle requires any change, its justification, and effect of net income be reported.

The disadvantages of FIFO are the recognition of paper profits and a heavier tax burden if used for tax purposes in periods of inflation.

The disadvantages of LIFO are LIFO matches the cost of goods not sold against revenues, it grossly understates inventory and it permits income manipulation.

The disadvantage for specific identification method is that it permits the manipulation of income. Units that are alike can be ship but have different cost could affect the gross margin of the sale for the same products.

The disadvantage for the weighted-average is companies manipulate income by buying or failing to buy goods near year-end, however the averaging process reduces the effects of buying and not buying

4. Question 4:
Proficient:
If inventory is being valued at cost and the price level is steadily rising, which of the following three methods of costing—FIFO, LIFO, or weighted average cost—will yield the lowest annual after tax net income?
LIFO would yield to lowest after tax income

Which method will yield the highest after tax net income in a scenario where the price level is steadily declining?
LIFO would yield th...


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... Chicago, Las Vegas. Retrieved May 8, 2014, from http://www.mcgoverngreene.com/archives/archive_articles/Craig_Greene_Archives/inventory_accounting.html
Inventories: Measurement. (2014, January 1). What is Included in Inventory?. Retrieved May 8, 2014, from http://connect.mcgraw-hill.com/sites/0077328787/student_view0/ebook/chapter8/chbody1/what_is_included_in_inventory_.htm
Hermanson, R., Edwards, J., & Maher, M. (2010).Accounting principles: A business perspective. (Vol. 2). Textbook Equity inc. DOI: www.textbookequity.com
Principles of Accounting. (2013, January 1). Principles of Accounting. Retrieved May 8, 2014, from http://www.principlesofaccounting.com/chapter8/chapter8.html
Siegel Ph.D. CPA, Joel G.; Shim Ph.D., Jae K. (2010-02-01). Dictionary of Accounting Terms (Barron's Dictionary of Accounting Terms) (p. 129). Barron's Educational Series. Kindle Edition.

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Accounting Questionaire Essay

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