*** MUST BE ORIGINAL WORK -- NO PLAGRIASM  ##DO not accept if you cannot meet this deadline   This week we turn our attention to the various inventory methods allowed by GAAP and the variety of depreciation methods accountants are allowed to choose from when depreciating a firms assets.  Accounting is not as strict as some believe in that it does allow for the selection of more than one approved method in each category.  Who says accounting is not flexible! One of the first things to recognize when we discuss inventory methods is that the method chosen to account for inventory has nothing whatsoever to do with the actual physical flow of materials through the firm’s warehouse and out to the customer.   This seems to be a hard concept for those new to accounting to grasp, but it is true.  A firm can choose to account for its physical flow of goods using the Last-In First-Out (LIFO) but can account for the inventory in the accounting records using the First-In First-Out method.  If you owned a grocery store, as an example, wouldn’t you want to move the oldest inventory first (FIFO) so it doesn’t deteriorate and go bad? In a period of rising prices, which is the norm for our economy, the FIFO method of inventory, when used for costing purposes, will result in the firm selling the cheaper goods first (on paper anyway) and leaving the goods purchased last, the more expensive goods, in inventory.  This means the Balance Sheet will reflect an inventory value that is close to actual cost.  However, by selling the goods that cost less first the cost of goods sold will be lower and as a result, profits will be higher. LIFO will result in exactly the opposite action.  Under LIFO, the firm would be selling the higher cost inventory (on paper anyway) first, so the Balance Sheet would reflect an inventory value that would contain the lower cost items so the inventory value would not reflect current replacement cost.  At the same time the cost of goods sold would be higher under this method, resulting in higher expenses and lower profits.  Lower profits also mean lower taxes, right? Finally there is a method called average cost which ends up costing the sold merchandise at a price in between FIFO and LIFO.  While this method can be a little tedious, inventory software makes this method less cumbersome to use than it otherwise would be.  Under this method, every time new inventory is purchased the average price of those units and the units already in inventory are averages together to arrive at a new average cost to be utilized for inventory costing purchases. One might get the notion that a firm could switch from one inventory method to another when it is financially beneficial to do so, but GAAP and the IRS have rules against that.  Basically you can switch from any method to LIFO by just submitting a form to the IRS.  Once you select LIFO however, you will be required to use it from that point on, except in very rare cases.  So, the typical inventory met ...

1. *** MUST BE ORIGINAL WORK -- NO PLAGRIASM
##DO not accept if you cannot meet this deadline
This week we turn our attention to the various inventory
methods allowed by GAAP and the variety of depreciation
methods accountants are allowed to choose from when
depreciating a firms assets. Accounting is not as strict as some
believe in that it does allow for the selection of more than one
approved method in each category. Who says accounting is not
flexible!
One of the first things to recognize when we discuss inventory
methods is that the method chosen to account for inventory has
nothing whatsoever to do with the actual physical flow of
materials through the firm’s warehouse and out to the
customer. This seems to be a hard concept for those new to
accounting to grasp, but it is true. A firm can choose to account
for its physical flow of goods using the Last-In First-Out
(LIFO) but can account for the inventory in the accounting
records using the First-In First-Out method. If you owned a
grocery store, as an example, wouldn’t you want to move the
oldest inventory first (FIFO) so it doesn’t deteriorate and go
bad?
In a period of rising prices, which is the norm for our economy,
the FIFO method of inventory, when used for costing purposes,
will result in the firm selling the cheaper goods first (on paper
anyway) and leaving the goods purchased last, the more
expensive goods, in inventory. This means the Balance Sheet
will reflect an inventory value that is close to actual cost.
However, by selling the goods that cost less first the cost of
goods sold will be lower and as a result, profits will be higher.
LIFO will result in exactly the opposite action. Under LIFO,
the firm would be selling the higher cost inventory (on paper
anyway) first, so the Balance Sheet would reflect an inventory
value that would contain the lower cost items so the inventory
value would not reflect current replacement cost. At the same

2. time the cost of goods sold would be higher under this method,
resulting in higher expenses and lower profits. Lower profits
also mean lower taxes, right?
Finally there is a method called average cost which ends up
costing the sold merchandise at a price in between FIFO and
LIFO. While this method can be a little tedious, inventory
software makes this method less cumbersome to use than it
otherwise would be. Under this method, every time new
inventory is purchased the average price of those units and the
units already in inventory are averages together to arrive at a
new average cost to be utilized for inventory costing purchases.
One might get the notion that a firm could switch from one
inventory method to another when it is financially beneficial to
do so, but GAAP and the IRS have rules against that. Basically
you can switch from any method to LIFO by just submitting a
form to the IRS. Once you select LIFO however, you will be
required to use it from that point on, except in very rare cases.
So, the typical inventory method chronology is that most firms
start out using FIFO because this results in the most profit
being shown on the financial statements. As time goes on the
firm becomes less concerned about higher profits and becomes
more concerned about saving tax dollars. At that time they
switch to LIFO, which results in a onetime large tax savings for
the firm. Once this is done, the firm must remain with the LIFO
method.
Switching gears now to depreciation: Depreciation is really
nothing more than the systematic allocation of a fixed assets
cost to expense over some predetermined period of time. Many
make the mistake of assuming that depreciation is trying to keep
the book value of the asset and the fair market value (FMV) at
the same figure. Nothing could be further from the truth. Take
a quick look at this video before you move on:
https://www.youtube.com/watch?v=dkalfcO_TZg
When a firm purchases a depreciating asset, like equipment or a
building, the IRS allows the firm to write off (expense) that
value to expense in a systematic fashion. Three methods

3. addressed by the text (there are others by the way) are straight
line, double-declining balance, and units of output methods.
Under the straight line method, the asset cost less the asset
salvage value is divided by the estimated useful life of the
asset. This becomes the annual depreciation expense that can
be taken to the income statement. More expense means less
profit and less tax, so everyone is happy, right?
The double-declining balance method is called an accelerated
depreciation method and results in higher depreciation amounts
being expensed in the early years of an assets life. Higher
expense means lower taxes, making this method fairly popular
among firms. Under this method the rate of straight line
depreciation is doubled. For example, if equipment costing
$100,000 with $20,000 salvage was depreciated over 5 years
under straight line depreciation, you would say the rate of
depreciation is 1/5 years or 20%. So the double declining-
balance method takes the 20% straight line rate and doubles it
to 40%. This 40% figure is then multiplied times the asset cost
(no salvage value is deducted up front under this method) which
results in $40,000 of depreciation expense being taken in the
first year. Under the straight line method annual depreciation
expense would have been (100,000 – 20,000)/5 = $16,000.
The units of output method takes the approach that an asset
wears out through use, so to figure the rate to use for
depreciation one would estimate the number of units (or miles
perhaps for a vehicle) that the asset is good for and then divide
the asset cost by the estimated units to get a per unit figure for
depreciation. Anytime a unit is produced a portion of the
depreciation is then allocated to expense.
The text does a good job of showing you examples of each of
these, so take some time to do the reading and then we will
discuss some of these concepts in the discussion threads this
week.
This week’s deliverables include:
Read Chapters 5 & 6 in the text. ( ATTACHED)

4. QUESTION : MINIMUM 250 WORDS
LIFO vs. FIFO
The controller of Sagehen Enterprises believes that the company
should switch from the LIFO method to the FIFO method. The
controller’s bonus is based on the next income. It is the
controller’s belief that the switch in inventory methods would
increase the net income of the company. What are the
differences between the LIFO and FIFO methods?