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Do you think that they should make the change? Why or why not?

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You are the CPA for a large firm that is having a rough year and may not make analysts’ forecasts. The firm is considering changing from LIFO to FIFO, as that will increase income and may put them at the point of making the analysts’ forecasts. Do you think that they should make the change? Why or why not?

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Posted 1

There are pros and cons to both the LIFO and FIFO inventory methods. Under the last-in, first-out (LIFO) method, the last unit to arrive in inventory is sold first. Under the first-in, first-out (FIFO) method the oldest unit is sold first. Determining which one to use depends on the nature of the organization and the product it offers. FIFO is more realistic, as most business aim to distribute old units before the newest ones. In this situation, I would recommend continuing the LIFO method. Changing the inventory approach to meet analyst forecasts will cause inconsistency in financial documents. Repeatedly switching from LIFO to FIFO will eventually create confusion and discrepancies within reports. Stay consistent to generate true results so that managers can develop effective strategies to improve the firm.

Posted 2


FIFO and LIFO are inventory valuation methods that can produce very different balances. Switching from one method to another can have significant impact on financial statements (Cromwell, 2019). If a company decided to change their valuation method to better support their analysts’ forecast, they would also need to determine if the change would have a significant impact on the financial statements and then if prior statements need to be restated. Financial statements usually show multiple years of data for investors to track the business over time. If it is practical under GAAP, then the company changes inventory valuation methods will need to recalculate and restate their prior inventory valuations (Cromwell, 2019).

No matter the decision on restatement, the company must disclose the change in the footnotes of the financial statements and provide detail about what the effect of the shift could be (Cromwell, 2019). This ensures that the company is compliance with the full-disclosure principle and gives investors a chance to make their own decisions regarding the company. The IRS recommends maintaining consistency regarding an inventory valuation method but does allow changes for various reasons. The company must notify the IRS and obtain permission for the first tax year of implementation (Cromwell, 2019). It may be more difficult to gain IRS permission to transfer from LIFO to another method.

If approved, the firm can make the switch to FIFO and it likely will increase income, but the company will need to determine if this is a short or long-term solution to their problems. The switch to FIFO will also increase the taxes the company is due to pay. Ultimately, the company’s investors will likely know they are not going to meet their forecast and the company will need to decide if the change is worth the additional changes and taxes to be accounted for.

Cromwell, J. (May 8, 2019). Chron. Rules for Changing from FIFO to LIFO. Small Business. Retrieved from

Posted 3


If the firm is using FIFO (First In First Out method), the oldest inventory is assumed to be sold first. This method is most suitable for time sensitive products like perishable goods or electronic goods. The inventory value in the balance sheet will reflect current costs, though matching of revenue and expenses will not be accurate. The FIFO method will produce high profits, as older cheaper inventory is sold at current selling price.

If the firm is using LIFO (Last In First Out method), the inventory last purchased is assumed to be sold first. Therefore, the matching of revenue and expenses in the financial statements will reflect a correct picture, though the inventory will be an undervalued asset in the balance sheet (old inventory costs). This method is suitable for non-perishable goods which are not time sensitive and don’t need to be updated with technological improvements. LIFO method will produce less than FIFO profits.

Internationally, LIFO is not allowed as per International Financial Reporting Standards (IFRS) in countries that follow the IFRS standards. Since FIFO profits are higher, the income tax liability will also be more. Also, if the taxpayer uses LIFO to report taxable income in the United States, the same method should be used for US GAAP financial statements preparation.

If the firm wants to change from LIFO to FIFO to improve profits, that can be done. However, it will take some time to complete the changes and the firm will also incur costs. Once the firm changes to FIFO for financial statements, it should also change to FIFO for income tax purposes and be ready to pay more income taxes


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