Jeanette Corporation’s president is in a dilemma regarding which inventory method (LIFO or FIFO) to use. The controller provides the following list of factors that should be considered before making a choice.
a. Jeanette has borrowed money during the current month and has entered into a debt contract. The covenants of this contract require Jeanette to achieve a certain amount of net income and maintain a certain amount of working capital.
b. The Jeanette’s board of directors is contemplating a proposal to reward the top corporate management with an incentive bonus based on accounting net income.
c. The vice president of finance suggests using the LIFO method for tax purposes and the FIFO method for financial reporting purposes. With lower taxable income, Jeanette can save on the current tax it pays, and, at the same time, it can show higher income in the financial reports and “look good.”
d. The controller cautions that while the LIFO method could reduce the current period tax liability, “it could hit us hard when things are not going so well.” This potential problem with the LIFO method could be “avoided if we use FIFO in the first place.”
e. However, the president would like to adopt the method that provides both a better application of the matching principle and a more current measure of inventory on the balance sheet.
f. The controller suggests that Jeanette adopt the FIFO method because higher accounting income means a higher stock price.

Jeanette’s president has asked you to write a report evaluating the pros and cons of each of the issues raised. Given her busy schedule, she would like the report to be brief. In answering this question, assume that Jeanette Corporation expects an upward trend in inventory prices.

  • CreatedSeptember 10, 2014
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