Submission Date Sep-9-2015
Three companies changed their inventory accounting policy. Find the reason behind the change and analyze the impact of the change on the Balance Sheet and Profit & Loss. What accounting lessons we can learn from these two cases?
1. Use a table to show general effects of FIFO vs. LIFO
Answer: Difference between FIFO and LIFO Market price rise | FIFO | LIFO | VS | Ending inventory | ↑ | ↓ | FIFO > LIFO | Total assets | ↑ | ↓ | FIFO > LIFO | COGS | ↓ | ↑ | FIFO < LIFO | Income tax | ↑ | ↓ | FIFO …show more content…
In this case, it is also unlikely that the company would change its inventory method.
1. Briefly describe types of these three companies (Blunt, Inc., Penn Central Corporation, and Quaker Oats Company) and what happened to each company. 2. Why do you think each company decided to change its inventory accounting method in 1987 and 1988? 3. Did the change impact the balance sheet or income statement for each company in a material way? 4. Did the reason given for the change make sense? Why, or why not. 5. What can explain why a move from LIFO was preferable for Blount, Inc. at the same time a move to LIFO was preferable to Penn Central and Quaker Oats? 6. What three major accounting lessons have you learned from these two short cases?
Company 1 Blount, Inc. change from LIFO to FIFO
Answer 1: Background
Blount, Inc. is an international company with operations in machinery and equipment manufacturing. Blount changed their inventory method from LIFO to FIFO on Sep 1, 1987. The change resulted in an increase of net income of $3.7M for the year ending Feb 29, 1988. The company says that FIFO method reflects more recent costs in the balance sheet and states this is the reason for their accounting change . The company continues to emphasize Japanese manufacturing techniques and just-in-time (JIT) methods for the future.
Selected financial data P&L'000 FIFO | 1988 | 1987 | 1986 | 88 VS 87 | 87 VS 86 |