Discussion 1:
There are advantages and disadvantages to using wireless networking. Considering the problems with security,
should wireless networking be a sole transmission source in the workplace? Why or why not?
Discussion 2:
Generally Accepted Accounting Principles (GAAP) allow companies to choose any inventory
costing method. GAAP also requires that companies consistently stick to one method. However,
companies do switch back and forth from FIFO to LIFO to Weighted Average and vice versa.
International Financial Reporting Standards (IFRS) value inventory in a similar method as GAAP.
Companies can use FIFO or average costs, but LIFO is not an option. Access and review the
following article from the CSU-Global Library:
Krishnan, S. (2012). Inventory Valuation Under IFRS and GAAP. Strategic Finance, 98(9), 51-58.
Select one item from the article that you found interesting and briefly share your views on
valuating inventory under GAAP versus IFRS. What ethical responsibilities, if any, do you have
with the issues presented?
Your selection from the article should be different from your classmates.
Some of the discussions already done by the classmates are:
Jeffers and Askew (2010) found that the adoption of IFRS inventory valuation standards will
allow for more standardized financial reporting that will facilitate the comparison of financial
statements of competing companies. For instance, Krishnan (2012) provided excerpts of Exxon
Mobile Corporation’ & Royal Dutch Shell’s balance sheets. While both companies are both
giants in the same industry, the inventories reported are remarkably different because Exxon
Mobile Corporation uses LIFO while Royal Dutch Shell uses FIFO. Krishnan (2012) explained
that comparison of the two company’s inventories is only possible when Exxon’s LIFO reserve
is added to their ending inventory. This makes it difficult to compare the companies at a
glance. Under IFRS inventory valuation, both companies will be forced to use similar inventory
methods which will result in financial statements that will allow stakeholders to better compare
financial statements. For this reason, I like the idea of valuating inventory under IFRS versus
GAAP.
The portion of the article that interested me the most was the section that discussed IFRS allows
companies to increase the value of their inventory to original cost if the company had already
decreased the value to the net realizable value in a previous period should the fair market value
in the current period justify the increase (Krishnan, 2012). To accomplish this, a debit entry to
Inventory and a credit entry to Cost of Goods Sold would be needed. The credit entry would
reduce the cost of goods sold account and therefore increase net income and gross
margin. However, the inventory is unsold. Essentially revenue is being recognized without
being prompted by a sale as Hermanson, Edwards & Maher pointed out (as cited in
Colorado State University-Global Campus, 2018). There is the chance that the fair value could
fall again before the end of the next accounting period and the asset will be sold at a lower price
than anticipated. Because this possibility exists, I feel it would be better not to increase the value
of inventory after already reducing it in a previous period should the market value rise. Instead,
this additional revenue should be recognized at the time of sale should the asset be sold at the
higher price.
The role I have at work requires me to report revenue on the construction projects our teams are
building. My supervisor has advised me that I should be conservative and that if there is the
potential of a loss, we have to recognize it as soon as we are aware of it. It is extremely
important that we do not overstate net income. But it is a fine line – we do not want to sandbag
revenue either and we have to support the decisions we make when posting revenues over the life
of these construction projects. In the same way, I think that companies should be conservative
when reporting inventory values, especially if it means recognizing revenue without a sale even
if the increase can be supported by current market conditions. If inventory value was reduced in
a previous period, I think it is best not to raise the value later when market conditions are better
even though this increase is capped by the amount of the original deduction.
What I find most interesting is the simple fact that the Last-In, First-Out (LIFO) method is not
accepted under the International Financial Reporting Standards (IFRS), even though the other
three inventory costing methods accepted under the Generally Accepted Accounting Principles
(GAAP) are accepted under IFRS. With some of the advantages of LIFO including showing
actual profit available for distribution while still replenishing inventory and reporting sales
revenue and cost of goods sold in current dollars, LIFO provides the benefit of not
overestimating your profit (Colorado State University, 2018). Not recognizing paper profit
would be helpful for realizing profit available for distribution at a quick glance, instead of
additional research being needed. According to Thiha Tun (2015), LIFO is barred under IFRS
due to the “potential distortions it may have on a company’s profitability and financial
statements”. He notes that with the IFRS rules being principle-based, LIFO cannot be accepted
under the principle that it may create a misrepresentation to net income during periods of
inflation. Under LIFO, inventory amounts are reported based upon “outdated and obsolete
numbers” (Thiha Tun, 2015) and opportunity for income manipulation is present.
Inventory valuation seems less confusing under GAAP than under IFRS, but that may be due in
part to the quantity of reading I have completed on GAAP versus IFRS. If I were to spend more
time researching IFRS, it is possible some of the nuances would become clearer. Referencing
Table 1 in Inventory Valuation Under IFRS and GAAP, the fact that there is a lack of explicit
guidance for consistency of measurement was surprising (Krishnan, 2012). IFRS seems to be
more detailed as it allows for deferred taxes to be recognized, requires far more specific detailed
disclosures, and permits reversals of write-downs. Because IFRS requires companies to switch
away from LIFO, tax revenues would increase greatly. Initially, that does not appear to be a
major consequence for the general population because increased tax revenue equates to increased
government funding. However, if companies begin experiencing a large increase in taxes, a
resulting consequence could be higher unemployment rates. If business expenses increase in the
form of higher taxes owed, money available for other expenses such as salaries would decrease.
Ethical responsibilities in regards to inventory costing methods involve a dedication to accuracy
and avoiding income manipulation. Inaccuracy may be the result of an honest mistake during the
physical count, but income manipulation comes from carefully timed purchases, or lack thereof,
of inventory. Both of these examples would result in inaccurate portrayals of a business’s
financial standing on the various financial statements, including overstating or understating net
income. Additionally, internal controls should be in place to attempt prevention of either
situation. In regards to my current career, I do not deal with inventory costing.
After reading the article, I found a few differences between GAAP and IFRS that
were pretty interesting. First, GAAP bases the value of their assets at
the historical cost and IFRS can reverse write down’s as the selling prices rise and
market price goes above the cost and values assets above the historical costs(Krishnan
& Lin, 2012). IFRS also allows the addition of interest to be added to the cost of
inventory should a company expect delays in sales of the inventory or if they purchase
the inventory on deferred settlement terms (Krishnan & Lin, 2012). These differences
alone can be significant to a company’s earnings. A significantdrawback in
transitioning to the acceptance of IFRS is that companies that use LIFO as a means to
value their inventory will no longer be able to do so and the reserves they have will
become taxable as a result and taxes will increase largely due to eliminating LIFO.
In the article, it mentions how SEC has allowed major companies to use IFRS
but was apprehensive initially because it gave companies an unfair advantage in
discovering which method they wanted to use (Krishnan & Lin, 2012). I agree with
this as other companies won’t know going forward once the transition happens. A
positive to adopting IFRS is that it will provide a more uniform way of using
accounting methods. The IFRS has a stricter policy on disclosures which in turn will
provide a transparent way to access comparisons of financial information between
companies which will contribute to investors having the ability to make better
decisions as well.
The ethical issues that come to mind are that in IFRS’s method of inventory
assessment there would be room to make mistakes as the market fluctuates since it
allows for reversals. Also, I would be interested to see how they monitor the interest
added to the cost of inventory. It seems to me that this could be a rule
that essentially could be taken advantage of.
The one item that stood out to me when I read this article is that when and if the
switch occurs to International Financial Reporting Standards (IFRS) from Generally
Accepted Accounting Principles (GAAP), the companies who have been using the
LIFO method to value inventory for years will have a lot of work to do to change
methods (Krishnan, 2012). A company that has been using the LIFO method would
need to anticipate a paying more in taxes, potentially changing their inventory system
in its entirety, as well as training employees on the new method of valuating inventory
(Krishnan, 2012). The article also mentions that the SEC would require three years of
statements for comparison, which means that companies would have to switch from
the LIFO method 3 years prior to the conversion to IFRS (Krishnan, 2012). This is
essentially forcing companies who use the LIFO method, to switch as soon as possible
in order to comply with the SEC requirements.
Personally, if I had my own company I wouldn’t chose to use the LIFO method as it
doesn’t seem as accurate as the other methods. The change to IFRS seems to be
reasonable in an attempt at standardizing inventory valuations yet still allowing for
variations. I believe that companies should be accurately reporting inventory and
subsequently accurately paying taxes. While many companies are forced to use the
FIFO (produce, food, etc) method, it doesn’t seem fair to have other companies
receive tax breaks because their products don’t expire or spoil and they are able to use
the LIFO method.
The ethical issue that I foresee in the switch from GAAP to IFRS, is the lack of
consistent financial reporting that the companies using LIFO would face. As a current
requirement of GAAP, the valuation of inventory within a company is to be consistent
year after year (Krishnan, 2012). Companies who use LIFO would be switching the
method of valuation of inventory, and there could be ethical loop holes in financial
reporting during the transition. Since companies using LIFO, usually pay less in taxes,
I would be worried that these companies would try to find fraudulent ways of
reporting inventory in order to keep their taxes at a lower amount.
Different colors are different students , mine should be different than the ones already
discussed by different students and after you are done with the discussion please respond to
two of the students with something interesting feedback. thanks
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