MGT101 GDB Solution Feb 2015

Discussion Question:

ABC Enterprise a Trader of Nokia phone sets at Multan, purchased 1,000 sets from the Nokia Company on 1st June 2014. 80 sets are returns back to the company due to the technical faults. 115 sets are remaining in the inventory on 30th June 2014. There is an inflationary period prevailing in the country. The Chief accountant of ABC Enterprise guides the junior accountant to show high profitability by adopting one of the inventory valuation methods permitted by International Accounting Standards.

1.      How many sets are transferred for calculating the Cost of Goods Sold of ABC Enterprise at the end of 30th June 2014? Show working.

2.      Which method a junior accountant should adopt for showing higher profitability? Give logical reasons in support of answer.

Solution: Firms often adopt the LIFO approach for the tax benefits during periods of high inflation, and studies indicate that firms with the following characteristics are more likely to adopt LIFO – rising prices for raw materials and labor, more variable inventory growth, an absence of other tax loss carry forwards, and large size. When firms switch from FIFO to LIFO in valuing inventory, there is likely to be a drop in net income and a concurrent increase in cash flows (because of the tax savings). The reverse will apply when firms switch from LIFO to FIFO.