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.
Calculations for depreciation are usually made using a variety of different values: cost of asset, expected salvage value, estimated useful life of the asset and a way of apportioning the costs over this life span. I would recommend using the straight line depreciation method as it is simple and usually fairly accurate. The annual cost of depreciation is the cost of the asset minus the salvage value, divided by the lifespan of the asset in years. This has benefits over the double-declining balance method, which doesn’t always depreciate an asset fully by its end of life. 3. Current Liability Current liabilities are obligations for the company to fulfil which are based upon previous transactions. This can be a debt or a duty which will have an economic effect on the company. The term “current” refers to the current fiscal year or the operating life of the company. Current liabilities are separated from long-term liabilities because they do not require payment or interest payment during the year, meaning that they should not be included in the financial year balance sheet. One example of a current liability could be a subscription, where the company has a liability to provide either the product (e.g. a magazine) or give a refund for the entire year, but no additional income will be gained. Another example could be a shop that provides a gift card option, as they have received payment but have a liability to provide the money or items to the customer. 4. Client Recommendations Sole proprietorship (as with a partnership) has the advantage of being easy to form, with no fees and no certificate of formation. However, a sole proprietor has sole liability for debts and liabilities of the business, meaning that it can be high-risk. Sole proprietors and partnerships have the benefit of being reported for taxation purposes on an individual’s income tax form with no need to report business taxes. Partnerships and sole proprietorship have the benefit of being more informal in structure and formalities. Corporations require a lot more paperwork and are subject to double taxation (business tax and shareholder tax). However, they do offer a limited amount of liability protection. For this reason, I would suggest