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Accounting: First In, First Out vs. Last In, First Out Essay (Critical Writing)


The US Generally Accepted Accounting Principles, or GAAP is the accounting standard that is in use in the companies throughout the United States. The GAAP is gradually being substituted by another set of principles, known as IFRS, or International Financial Reporting Standards. Some critical differences between IFRS and GAAP make the move complex, as it drastically changes the taxation schemes involved. The main reason for the difference lies within the financial statements domain, which results from the different accounting methods used for the two standards, as well as the evaluation principles of the non-current assets.

The accounting methods most commonly applied in GAAP are the FIFO and LIFO, which stand for “First In, First Out” and “Last In, First Out”, respectively. These are the inventory valuation methods and are used by companies to attribute financial value to the goods, materials, and inventory they own. The “Last In, First Out” model requires the materials that were received recently to be sold or sent into the production cycle first.

The “First In, First Out” model, on the other hand, places a priority on items received before more recent equivalents. Among other things, this difference impacts the financial statements in several ways. First, if the cost-to-good expense will be higher during the rise of the cost of goods when using the LIFO method, and lower when using the FIFO, the reverse effect will be observed on the end-of-period inventory values, which will be lower in the case of using FIFO during the decrease of the cost, and higher in the case LIFO is applied.

This difference is of little concern for the companies that use GAAP, as this standard recognizes both methods. The IFRS, on the other hand, does not allow LIFO to be used. The generally predicted outcome is higher net income due to the different calculation methods.

A similar situation persists in evaluating the long-lived intangible assets, more specifically, goodwill. Goodwill is the difference between the worth of an acquired company and its actual value. Under some conditions of the market, goodwill can be impaired. The GAAP suggests measuring the impaired goodwill concerning fair value. The IFRS makes possible a more flexible scheme, allowing the buyer to adjust the cost of the impairment, which may positively influence the total expense and thus benefit the net income (Christian & Lüdenbach, 2013).

What makes the issue especially pressing is the recent reform that is underway in the US, in which companies are required to switch from GAAP to IFRS. While this may be beneficial for larger-scale business, making it accessible for non-US stakeholders and subsidiaries, companies that use LIFO will suffer negative impact as they will be pressed to change the accounting schemes, which will alter their financial statements. The main change in this scenario will include the growth of income recognition, resulting from the rising end-of-period inventory values. This, in turn, will lead to higher net income, and, as a result – larger income tax liabilities.

For this reason, Bloom and Cenker (2009) stress the need to relax the rule of disallowing LIFO. The goodwill impairment calculation difference is more complex and will result in different outcomes depending on the situation, but is generally deemed as a positive influence.

References

Bloom, R & Cenker, W. J. (2009). Web.

Christian, D & Ludenbach, N. (2013). IFRS essentials. New York, NY: John Wiley & Sons.

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IvyPanda. (2020, September 2). Accounting: First In, First Out vs. Last In, First Out. Retrieved from https://ivypanda.com/essays/accounting-first-in-first-out-vs-last-in-first-out/

Work Cited

"Accounting: First In, First Out vs. Last In, First Out." IvyPanda, 2 Sept. 2020, ivypanda.com/essays/accounting-first-in-first-out-vs-last-in-first-out/.

1. IvyPanda. "Accounting: First In, First Out vs. Last In, First Out." September 2, 2020. https://ivypanda.com/essays/accounting-first-in-first-out-vs-last-in-first-out/.


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IvyPanda. "Accounting: First In, First Out vs. Last In, First Out." September 2, 2020. https://ivypanda.com/essays/accounting-first-in-first-out-vs-last-in-first-out/.

References

IvyPanda. 2020. "Accounting: First In, First Out vs. Last In, First Out." September 2, 2020. https://ivypanda.com/essays/accounting-first-in-first-out-vs-last-in-first-out/.

References

IvyPanda. (2020) 'Accounting: First In, First Out vs. Last In, First Out'. 2 September.

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