Share
Explore BrainMass

choosing between LIFO and FIFO inventory methods

You have just been hired as a consultant to Tangier Industries, a newly formed company. The company president, John Meeks, is seeking your advice as to the appropriate inventory method Tangier should use to value its inventory and cost of goods sold. Mr. Meeks has narrowed the choice to LIFO and FIFO. He has heard that LIFO might be better for tax purposes, but FIFO has certain advantages for financial reporting to investors and creditors. You have been told that the company will be profitable in its first year and for the foreseeable future.

Required:

Prepare a report for the president describing the factors that should be considered by Tangier in choosing between LIFO and FIFO.

Solution Preview

Dear Mr. Meeks:

I would recommend the FIFO method. Here's why. LIFO uses the most recent costs in the computation of earnings and taxes payable. When costs are rising, this means that earnings and taxable income will be smaller and this reduces current taxes (and creates a deferred tax liability). So, while this minimizes cash flow for taxes (delays the payment), it makes the first ...

Solution Summary

Your tutorial is 258 words and recommends FIFO with reasons.

$2.19