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2 companies have same operational results. If the company using FIFO switches to LIFO in an inflationary setting, who will report a higher net income?

Company A uses FIFO. Company B uses LIFO. Company A switches from FIFO to LIFO. Keep in mind it is an inflationary environment.

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Question added by Ahmed Saeed , Supply Chain and Purchasing Manager , Tuff Gear Ltd.
Date Posted: 2013/12/31
Mohammad Tohamy Hussein Hussein
by Mohammad Tohamy Hussein Hussein , Chief Executive Officer & ERP Architect , Egyptian Software Group

If they sell the same quantities for the same price (same operational results), they will report the same revenue (income).

The company using LIFO wil have a higher cost of goods sold (due to the inflationary setting) and therefore will report less profitability.

mukkur srinivasan varadhan
by mukkur srinivasan varadhan , Chartered Accountant , Chartered Accountant in practice

In FIFO,presumption is stock available  the latest arrived. Hence stock is valued at recent (more) price.Hence profit more.The more the price the more the artificial profit in times of inflation.

In LIFO presumption is latest stock sold out.Hence stock available is previous one.Hence, stock is valued at earlier price(less).Hence profit is less.

IFRS prohibits LIFO, Maybe FASB(US) is ok with LIFO.Comparison is possible under one and the same standard only. Suppose, LIFO is allowed. Under the above circumstances, disclosure on change and the quantum is required to bring both companies under the same denominator.

As per this, whether above A company or B company will have to show the same net adjusted result.

IFRS has International Acceptance including Gulf.US also started changing direction towards IFRS.

Raed Jaabo CPA, PhD
by Raed Jaabo CPA, PhD , CEO , professionals

FIFO will show higher income

Laiq Saad
by Laiq Saad , Senior Accountant , Etihad Motqn Contracting Co.

If for both companies the sales, material purchase & stock level remains same than company using FIFO method will post better results in inflanatoiry situation

Sohail Lone
by Sohail Lone , Assistant Manager Audit , Deloitte - United Arab Emirates

LIFO is no more used as valuing Inventory as per IAS's and IFRS;s

brian ombati
by brian ombati , Bursar , Kids' Dream Children's Home

If a company switches from FIFO (First-In, First-Out) to LIFO (Last-In, First-Out) in an inflationary environment, the company typically reports a higher net income going forward. This is because LIFO matches the most recent, and often higher-priced, inventory costs with revenue. In an inflationary environment, newer inventory costs are higher than older ones. By using LIFO, the company is expensing these higher costs against revenue, resulting in lower taxable income and higher reported net income. This is contrary to FIFO, where older, lower-cost inventory is matched with revenue, leading to lower reported profits in times of inflation.

Abdul Wahab
by Abdul Wahab , Credit Controller , Takween Advanced Industries

Depends On Material Purchased, Demand And Price..

Thomas Wilfred Nehumba
by Thomas Wilfred Nehumba , Administration Assistant Manager , Deloitte

Company may Switch to LIFO

Emma Cepillo
by Emma Cepillo , SALES ASSOCIATE , AUTOMATIC RESTAURANT AND GRILL

I usually eat in the office pantry/ lunch room with my colleagues if I'm in the office. Ideally I will be having lunch with a client or a prospect. I believe taking a short break from work in the middle of the day helps socialize with and understand our colleagues and lets us pick up on what is going on in the organization. I have also read that it improves productivity, clarity, gives new ideas and improves our overall performance in the work place.

Umer Sharif
by Umer Sharif , Consultant Lead Financial, Functional, Implementation of Infor ERP Syteline ‚ Eccountant & SmartHCM. , Bin Rasheed Technology Pvt Ltd.

very simple FIFO. Bcoz the last inventory purchased at higher price will be selling in last.

Wasif Ali
by Wasif Ali , Stock & Credit Controller , Petrogas Company Ltd.

FIFO will result in higher profit. The reason why LIFO is banned in IFRS is just because it results in lower profits thus results in lower taxes for inflationary economies

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