conservative accounting policy or aggressive ?

H

hw0799

New member
Joined
Nov 26, 2007
Messages
0
Reaction score
0
is it always true that FIFO and capitalize are aggressive accounting policy no matter what? or depends.
if it depends, dose it work in this way:
if in a rising price environment, FIFO will over estimate inventory balance, which lead to over estimated asset. so FIFO is considered aggressive.
if it is declining price environment, the LIFO will be aggressive?
what happen to capital lease or operating lease? Thanks.
 
hw, not quite.
LIFO is always superior from an income statement perspective, as gross profits are more reflective of current inventory replacement costs. FIFO is always superior from a balance sheet perspective, as older inventory moves off the books first, leaving only more recently-acquired inventory whose value is more aligned with market value.
While I wouldn’t make the blanket claim that using FIFO is always more aggressive, that’s a fair conclusion for the situation of rising inventory replacement costs. This has nothing to do with inventory balance, but rather, because older, relatively cheap inventory is moving off the balance sheet through COGS in the income statement, gross profits will be overstated.
Again, with capital- vs. operating leases, I wouldn’t claim that the use of an operating lease is necessarily aggressive. However, if a company leases a large portion of its assets and most of those are operating leases, it’s worth inquiring why the company is trying to keep so many assets off its books.
capitalizing other normal operating expenses, like advertising, calling it “customer acquisition costs” for example, would be aggressive because it understates current expenses by deferring a portion of them for recognition in future periods.
 
so, it looks like depends on the situation.
for FIFO or LIFO, which ever over estimate inventory balance, which lead to a higher asset value, will be conisered aggressive?
capitalization or operating, which lead higher net income will be considered aggressive?
thanks.
hiredguns1 Wrote:
——————————————————-
> hw, not quite.
>
> LIFO is always superior from an income statement
> perspective, as gross profits are more reflective
> of current inventory replacement costs. FIFO is
> always superior from a balance sheet perspective,
> as older inventory moves off the books first,
> leaving only more recently-acquired inventory
> whose value is more aligned with market value.
>
> While I wouldn’t make the blanket claim that using
> FIFO is always more aggressive, that’s a fair
> conclusion for the situation of rising inventory
> replacement costs. This has nothing to do with
> inventory balance, but rather, because older,
> relatively cheap inventory is moving off the
> balance sheet through COGS in the income
> statement, gross profits will be overstated.
>
> Again, with capital- vs. operating leases, I
> wouldn’t claim that the use of an operating lease
> is necessarily aggressive. However, if a company
> leases a large portion of its assets and most of
> those are operating leases, it’s worth inquiring
> why the company is trying to keep so many assets
> off its books.
>
> capitalizing other normal operating expenses, like
> advertising, calling it “customer acquisition
> costs” for example, would be aggressive because it
> understates current expenses by deferring a
> portion of them for recognition in future periods.
 
hw, inventory balance is not factored into the assessment of whether LIFO/FIFO is aggressive. FIFO always results in an inventory balance that’s more closely aligned with market value. However, this isn’t a big deal because we can use the LIFO Reserve to convert a LIFO inventory balance into a FIFO inventory balance.
The crux of the issue is profitability, so let’s turn our attention back over to the income statement. The problem with FIFO during periods of rising inventory replacement costs is that gross profits will be overstated, making the company appear to be more profitable than it ought to be, particularly in contrast to any of its peers using LIFO.
Gross profit = Sales - COGS
So, as we’ve discussed, COGS will be lower under FIFO, gross profit too high.
On a side note, FIFO is more prevalent outside the U.S.
 
thanks. it make sense.
I still have question, an accounting rule is conservative or not, depends on the situation , is it? so in a price decreasing case, LIFO will be considered aggressive? Thanks.
hiredguns1 Wrote:
——————————————————-
> hw, inventory balance is not factored into the
> assessment of whether LIFO/FIFO is aggressive.
> FIFO always results in an inventory balance that’s
> more closely aligned with market value. However,
> this isn’t a big deal because we can use the LIFO
> Reserve to convert a LIFO inventory balance into a
> FIFO inventory balance.
>
> The crux of the issue is profitability, so let’s
> turn our attention back over to the income
> statement. The problem with FIFO during periods of
> rising inventory replacement costs is that gross
> profits will be overstated, making the company
> appear to be more profitable than it ought to be,
> particularly in contrast to any of its peers using
> LIFO.
>
> Gross profit = Sales - COGS
>
> So, as we’ve discussed, COGS will be lower under
> FIFO, gross profit too high.
>
> On a side note, FIFO is more prevalent outside the
> U.S.
 
You must log in or register to reply here.
Back
Top