Paper Topic:

financial advisor

Financial Advisor

To protect cash flows , a significant number of companies change to last in , first out (LIFO ) inventory to reduce their present and future tax liabilities ( SMITH SKOUSEN , 1992

Based on the situations given , since the business sales are good , the company may use last in , first out method of inventory (LIFO . The said method minimizes the business tax obligation because the costs of goods are usually high and therefore produces lower profit . Lower profit means lesser tax liability . The change of inventory method from first in , first out (FIFO

) to last in , first out is justified because the cost of inventory has increased and for this reason , it puts the business in a tight cash position . The impact of the change on income due to change of inventory method on the current year must be disclosed in a note to the statements

According to Smith and Skousen (1992 ) that the last in , first-out is based on the assumption that the latest costs of a specific item should be charged to cost of goods sold . Inventories are thus stated at earlier cost and expense is charged with the most recently incurred costs

However , when the condition worsen and it affects the ability of the company to sell goods , it is recommended to change to first in , first out (FIFO ) method to avoid loss of perishable goods

REFERENCE

JAY M . SMITH K . FRED SKOUSEN (1992 . Intermediate Accounting

Mutual Books , Inc...

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