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If two companies post identical operating results, but one uses LIFO and one uses FIFO for its calculation of inventory. If the company using FIFO switches to using LIFO in an inflationary environment, who will report a higher net income going forward?
The company using FIFO will report a higher net income since it will be expensing out inventory which was delivered before the inflation occured (hence lower cost).
Whilst the company using LIFO will report a lower net income since it will be expensing out inventory which was delivered during the inflationary period (hence higher cost).
Yes during the inflationary period, shifting of pricing method of an inventory from FIFO to LIFO, as per the FIFO method:
If cost are incrasing (inflationary) the itsms pruchased are cheaper, this dreceases the cost of goods sold (COGS) and incease the profit (income) the ending inventory value is higher.
Then treat vice versa for LIFO method.
But as per the problem, the company is switching the method from FIFO TO LIFO, there is drop in net income correspondingly increase in cash flow due to tax savings. The auditor should note the value of inventory difference while switching the method from FIFO TO LIFO.
If the company using FIFO
Ending inventory will be high this lead to Cost of good sold will be low and then Net income will be high
If the company using LIFO
Ending inventory will be low this lead to Cost of good sold will be high and then Net income will be low
That's means FIFO will generate high net income,
Under IFRS LIFO is prohipited and Under GAAP LIFO is permitted
yes during the inflationary period shifting of pricing method of an inventory from fifo to lifo as per the fifo method if cost are incrasing ...
In an inflationary environment (where costs are rising), switching from FIFO (First-In, First-Out) to LIFO (Last-In, First-Out) will generally result in lower reported net income going forward
the company that is following fifio methos
well First of all LIFO system is allowed anymore as per IAS. Secondly anyways if they switch from FIFO to LIFO than Stocks in hand will be of lower value bcoz all the stock made in the inflationary environment will be sold first (has high value) a result Profit will be SHOT DOWN
The stock positions in FIFO shows accurate to value hence FIFO holds a higher income values since there will a replacement cost match to an issue prices if when LIFO is operated during inflationary times.
In an inflationary environment, LIFO will result in lower net income compared to FIFO because of the higher COGS associated with the most recent, more expensive inventory.
When a company switches from FIFO (First-In, First-Out) to LIFO (Last-In, First-Out) during an inflationary period, it often reports higher net income initially. This happens because LIFO matches more recent, higher-cost inventory with current sales, leading to a higher cost of goods sold (COGS). Higher COGS reduces taxable income, thereby resulting in higher net income.
Additionally, a switch from FIFO to LIFO could impact financial ratios, comparisons with prior periods, and may require disclosure in financial statements due to changes in accounting methods. It's essential for companies to carefully evaluate the long-term implications and consult with accounting professionals before making such a change.
