Accounting

Jessica Reid

April 30, 2015

U.S. GAAP SHOULD ELIMINATE LIFO

Jessica Reid

April 30, 2015

U.S. GAAP SHOULD ELIMINATE LIFO

Introduction

In most companies, inventory can be a large part of a company’s assets. There are many methods that these companies may use to account for inventory. Among these methods, the two most common methods are LIFO and FIFO. The choice of the accounting method has a direct affect on a company’s balance sheet, income statement, and cash flow statement. LIFO means Last in, First out which assigns the last costs of inventory to the first costs assigned to cost of goods sold. FIFO means First in, First out which the first costs into inventory are the first costs assigned to cost of goods sold. The debate under U.S. GAAP is whether or not to eliminate LIFO or keep the method.

Analyzing the advantages and disadvantages of LIFO and FIFO, the perspective taken is that LIFO should be eliminated and FIFO should be continued. LIFO should be eliminated because “LIFO is not a good indicator of ending inventory value because the leftover inventory may be extremely old and, perhaps, obsolete.” LIFO results in a valuation much lower than current prices, and “LIFO users believe that advancement is by reinvesting money into their businesses by purchasing inventory at current market prices rather than saving money by selling older, less expensive inventory.” Most companies prefer to buy new inventory instead of selling the older inventory. This process is what causes inventory to become obsolete.

Why LIFO Should Be Eliminated

According to FASB 330-10-30, FIFO is a cost flow assumption that means the first items that come in are the first items sold, whereas, LIFO is a cost flow assumption that means the last items in are the first sold. Across the U.S., LIFO is a preferential method for companies who sells items that are not perishable. Although LIFO should be eliminated, there are many advantages to the LIFO method. For instance, under LIFO,...