W3 - Discussion 1 - LIFO vs FIFO - The controller of Sagehen Enterprises believes that the company should switch from the LIFO method to the FIFO method

W3 - Discussion 1 - LIFO vs FIFO - The controller of...

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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 net 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? LIFO (Last in first out) is the method that assumes the units sold are the most recent units purchased. Whereas, FIFO (First in first out) is the method that assumes the units sold are the first units acquired. “With FIFO, keep in mind that the layers of inventory assumed to be sold are based on the chronological order in which they were purchased” (Wainwright, 2012). Whether it will be FIFO or LIFO that produces the highest or lowest value of cost of goods sold and ending inventory depends on the pattern of the actual unit cost changes during the period (Spiceland, 2011). If in a period there are rising costs, FIFO results in a lower cost of goods sold then LIFO because the lower costs of the earliest items are sold. LIFO would mean the goods sold were the higher cost goods. With this in mind, it also means the ending inventory for FIFO would be higher since the lower cost goods were sold first and LIFO has a lower ending inventory since the higher cost goods were sold first. In a period that has declining costs the LIFO method would be ideal to give a higher ending inventory. Reference Wainwright, S. (Ed.). (2012) . Principles of Accounting: Volume I . San Diego, CA: Bridgepoint Education, Inc. This text is a Constellation™ course digital materials (CDM) title. Spiceland, J. D., Sepe, J. F. & Nelson, M.W. (2011). Intermediate Accounting (6th ed.). New York, N.Y.: McGraw-Hill Irwin. ISBN: 9780077500375

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