Disadvantages of the lifo costing method, Data Structure & Algorithms

Assignment Help:

The disadvantages or limitations of the last in first out costing method are:

  1. The election of last in first out for income tax purposes is binding for all subsequent years unless a change is authorized or required by the Internal Revenue Service (IRS)
  2. This is a "cost only" method with no right down to the lower of cost or market allowed for income tax purposes. Furthermore, the IRS requires that when last in first out is adapted an adjustment must be made to restore any previous right downs from actual cost. Should the market decline below LIFO cost in subsequent years, the business would be at a tax disadvantage. When prices drop the only option may be to charge off the older (higher) cost by liquidating the inventory, however, liquidation for income tax purposes must take place at the end of the year. According to IRS regulations, liquidation during the fiscal year is not acceptable if the inventory returns to its original level at the end of the year. Interim external financial reporting principles impose a similar requirement when inventory is expected to be replaced by the end of the annual period.
  3. LIFO must be used in financial statements if it is elected for income tax purposes. However, for financial reporting purposes, the lower of LIFO cost or market can be used without violating IRS LIFO conformity rules.
  4. Record keeping requirements under this method, as well as FIFO, are substantially greater than those under alternative costing and pricing methods.
  5. Inventories may be depleted due to unavailability of materials to the point of consuming inventories costed at older or perhaps the oldest prices. This situation will create a miss matching of current revenue and cost, sometimes companies using this costing method counteract this problem by establishing an allowance for replacement of the LIFO inventory account. Cost of goods sold is charged with current cost. The allowance account is credited for the access of the current replacement cost over the LIFO carrying cost for the inventory temporarily liquidated. When this inventory is replenished, the temporary allowance (credit) is removed and the goods acquired are placed in inventory at their old last in first out cost.
  6. In standard number 411 "accounting for acquisition costs of materials, " the cost accounting standards board "CASB" precludes the use of LIFO except when applied currently on a specific identification basis. As a result, the use of this method, when an annual LIFO adjustment is made, is ruled out for government contracts to which CASB regulations apply.

The decision to adopt the last in first out method has had increased appeal in the last few years, due to an accelerated rate of inflation; however its adoption should not be automatic. Long range effects as well as short term benefits must be considered.


Related Discussions:- Disadvantages of the lifo costing method

Time complexity, how to learn about time complexity of a particular algorit...

how to learn about time complexity of a particular algorithm

Deletion from a red-black tree, Deletion in a RBT uses two main processes, ...

Deletion in a RBT uses two main processes, namely, Procedure 1: This is utilized to delete an element in a given Red-Black Tree. It involves the method of deletion utilized in

Acyclic graphs, Acyclic Graphs In a directed graph a path is said to fo...

Acyclic Graphs In a directed graph a path is said to form a cycle is there exists a path (A,B,C,.....P) such that A = P. A graph is called acyclic graph if there is no cycle in

Steps of pre-order traversal, Pre-order Traversal The method of doing a...

Pre-order Traversal The method of doing a pre-order traversal iteratively then has the several steps(suppose that a stack is available to hold pointers to the appropriate nodes

What do you mean by hash clash, What do you mean by hash clash? Hashing...

What do you mean by hash clash? Hashing is not perfect. Occasionally, a collision occurs when two different keys hash into the same hash value and are assigned to the same arra

The smallest element of an array''s index, The smallest element of an array...

The smallest element of an array's index is called its Lower bound.

Algorithms for push and pop operation, Q. Suggest a method of implementing ...

Q. Suggest a method of implementing two stacks in one array such that as long as space is there in an array, you should be capable to add an element in either stack. Using proposed

Algorithm, Define what an algorithm is and outline the characteristics of a...

Define what an algorithm is and outline the characteristics of a good algorithm.

Tree structure, We would like to implement a 2-4Tree containing distinct in...

We would like to implement a 2-4Tree containing distinct integer keys. This 2-4Tree is defined by the ArrayList Nodes of all the 2-4Nodes in the tree and the special 2-4Node Root w

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd