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:
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...
... middle of paper ...
... 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.
Need Writing Help?
Get feedback on grammar, clarity, concision and logic instantly.Check your paper »
- 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.... [tags: Inventory, Tax, Cost]
1160 words (3.3 pages)
- In first part of the assignments, I have narrowly defined the term accounting profit, forming a technical discussion on the basic accruals concept and the literal difference between accounting profit and true profit. This was portrayed by Hines (1988) as simply ‘measuring the reality’ without questioning who created the reality. Throughout this module, I have developed awareness on the level of sovereignty held by the standards-setters who determine how accounting profit is calculated. Instead of focusing on accrual assumptions, this essay will examine the formulation and implementation of the Conceptual Framework as a whole.... [tags: accounting policies, accounting practices]
996 words (2.8 pages)
- Managerial accounting, also known as cost accounting, is defined by the textbook as the phase of accounting that is related to providing information to managers for use within the organization (Noreen, Brewer, & Garrison, 2014, p. 19). Managerial accounting information is aimed at helping managers within the organization make sound business decisions. On the other hand, financial accounting is focused on providing information to individuals outside the organization. Managers rely on cost accounting to provide them with an idea of the actual expenses related to processes, departments, operations or products which are the basis of their budget procedures.... [tags: Management accounting, Cost accounting, Ethics]
912 words (2.6 pages)
- The accounting system we use today started in Venice in renaissance period over 520 years ago. The trade business increased hugely during this time and all the financial recordings had to be written down to help people see how their business is doing. During that time in 1494 the first book about was published in accounting by Luca Paciolli and was called “The Collected Knowledge of Arithmetic, Geometry, Proportion and Proportionality”. He was called “The father of Accounting” and most of his described principles have been used up until this day.... [tags: Accounting]
1499 words (4.3 pages)
- Deceptive Accounting 1.Describe the legal and ethical issues surrounding Andersen’s auditing of companies accused of accounting improprieties. In this case study, in my opinion, the causes of that the Andersen’s auditing of companies accused of accounting improprieties, it’s has a main factor. Because Athur Andersen do not think about the company who is to cooperate whit it is like Athur Andersen to make deceptive accounting. These four real cases to show us how they operate the deceptive accounting.... [tags: Finance Accounting Case Analysis]
1331 words (3.8 pages)
- Accounting On September 28, 1998, Chairman of the U.S. Securities and Exchange Commission Arthur Levitt sounded the call to arms in the financial community. Levitt asked for, "immediate and coordinated action… to assure credibility and transparency" of financial reporting. Levitt’s speech emphasized the importance of clear financial reporting to those gathered at New York University. Reporting which has bowed to the pressures and tricks of earnings management. Levitt specifically addresses five of the most popular tricks used by firms to smooth earnings.... [tags: Accounting Finances Money Essays]
2347 words (6.7 pages)
- Introduction Financial statements What carries out the accounting and financial forecasting of any type of company is financial statement. As for financial statement, it is a financial report or record compiled usually on a quarterly and annual basis which quantitatively provides the indication of an individual’s, an organization’s, or business’s financial status. There are, according to belief of most experts, generally three financial statements such as: an income statement (Pro Forma Profit and Loss), a balance sheet and a cash flow statement.... [tags: Accounting]
1627 words (4.6 pages)
- The Financial Accounting Standards Board is board of seven independent members who are accounting professionals that was developed in 1973. This seven member group is responsible for communicating the standards that are in place for financial accounting and reporting that takes place in the United States. Generally accepted accounting principles (GAAP) are the standards that are used by the FASB to govern the way in which corporations prepare their financial reports. This process of utilizing these standards to maintain and report accounting files is the only method that the US Securities and Exchange Commission will accept.... [tags: Business Accounting Finance]
1116 words (3.2 pages)
- Accounting Introduction The financial information is a very important matter in a company success. Allow them to see if they have been successful in the past, in the present and help them to predict a future performance of you company. The form, the use and the people involve with the financial and accounting information in a company is going to be developed in this report. Accounting Knowing the status of your company in every single area will allow you to improve your performance and developed strategies with a solid background for a successful operation.... [tags: Business Accounting Finance]
1235 words (3.5 pages)
- According to the Generally Accepted Accounting Principles, T-Shirts by Tommy can account for the accident is to record an extraordinary item. Using the definition from our Intermediate Accounting textbook, extraordinary events are defined as, " events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence" (Keiso). Because of the nature of the plane crash, and the fact that these types of accidents happen very rarely, it can definitely be categorized as extraordinary.... [tags: Business Analysis Accounting Finance]
1607 words (4.6 pages)
- Capital Punishment: A Controversial Topic
- Social Media, Free Speech and the Judicial Legacy of the Tinker Case
- Workplace Transformation and Its Importance
- Corporate Social Responsibility and Business Success
- England: A Poised and Traditional Country
- Obsessive Compulsive Disorder: Types and Treatment