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LIFO Method in Accounting for Inventories - Case Study Example

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The paper "LIFO Method in Accounting for Inventories" describes that firms often adopt LIFO method in accounting for inventories when there is high inflation and the firms want to save on tax. If a firm switches from FIFO to LIFO, the net profit is reduced but an increase in the cash flow…
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LIFO Method in Accounting for Inventories
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Download file to see previous pages Finished stocks: While the sales are close to budgeted figures, the finished stocks have increased by 46% compared to budget. The increase in finished stocks means that the production of finished goods was more than sales. In planning for production, the previous stocks that the company already had may not have to take been into account. Another possible reason for the increase in finished stocks could be the return of goods from customers that bought the goods in the previous budget period. If the finished stocks are allowed to continue to increase, the company would incur unnecessary inventory cost. After a certain stage, this would become unsustainable as finished goods would stay in inventory with inventory turnover decreasing and leading to higher working capital requirement.
Debtors: The outstanding receivables have increased by 50% compared to budget with sales the same as budgeted. The increase in debtors’ may have been due to more sales made on credit to the customers/distributors or due to fewer payments received from them. If this is allowed to continue, the company would have lesser money available to pay the suppliers or to service the bank debt. This would mean that the company would then need to raise more money either get more bank loan or raise equity capital.
Bank: The bank component turning negative means that the company has used up all the money in its account and now has a loan from the bank to the amount of £ 39,000. If this is allowed to continue, the bank would keep charging interest leading to lower profitability for the company. For any new payments to be made, the company would need to draw more credit from the bank or would need to pass on all money received from customers to the suppliers. The company’s cost of capital would increase making investments in some projects less lucrative.
Creditors: The liability to creditors has decreased by 77% compared to budget.  ...Download file to see next pagesRead More
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