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Working capital - Assignment Example


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Working capital

The controller of this company may benefit from moving to the FIFO method as this is an approved accounting method, whereas LIFO is not accepted by IFRS. The effect of inflation on the two processes is different. In inflation, the FIFO method is based upon the fact that the goods acquired earlier were cheaper to buy, which increases profit, decreases cost of goods sold, and the value of the unsold inventory is higher. The LIFO method works around the principle that goods acquired more recently are more expensive, meaning income tax is lower, COGS is increased and decreases net profit. Record keeping may also be easier using LIFO, because goods are sold from the earliest piece of inventory there will be less unsold goods to keep a record of. In FIFO, the earliest goods may stay in the inventory for many years and therefore increases the need for record keeping from an early date. Goods from a number of years ago (as found in FIFO) may also cause the need to record strange fluctuations in cost of goods because their purchasing price may be radically different from the present day. 2. Depreciation Depreciation is the decrease in cost of assets. To properly provide an accurate net income for a company, it is important to also include the cost of this depreciation into income reports. It is important to account for depreciation in value of an important asset because this reflects a cost to the business, despite the fact that the original purchase has already been made. It is a method of allocation.

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LIFO (last in, first out) and FIFO (first in, first out) are two different ways of accounting for the value of unsold inventory. The FIFO method considers unsold inventory to be that which has been acquired most recently, and the LIFO method uses the goods bought earliest as the unsold inventory. …
Author : ngutmann
Working capital
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