Question

what is your recommendations to wild water sports changing from lifo to fifo

Answer 1

The FIFO and LIFO valuation methods are examples of accounting principles that measure the value of inventory. FIFO and LIFO value inventory very differently, so the same inventory can have different balances depending on the method. Therefore, switching from FIFO to LIFO can have a significant impact on all financial statements. A business switching from FIFO to LIFO will need to consider whether it needs to restate its financial data for prior years to reflect the new method or only apply the new method to the current and future years.

What method is used depends on the circumstances. However, the business will always have to disclose the change in the footnotes to the financial statements.

FIFO stands for first-in, first-out. Under this method, items that go into inventory first are considered to be the items that are sold first for valuation purposes. LIFO stands for last-in, first-out. This valuation method assumes that the latest inventory items are the first sold.

Retrospective vs. Prospective

Financial statements generally show several years of activity to allow investors to evaluate the business over time. Normally under generally accepted accounting principles (GAAP), when there is a shift in accounting principles the asset balances and income amounts for the prior years are adjusted to what they would have been if they had been calculated under the new standard. However, adjusting prior-year inventory balances to be based on a LIFO calculation is generally impractical.

Impractical for GAAP purposes means that it is impossible for the business to make inventory adjustments for prior years based on independently substantiated criteria and objective information about past market and managerial conditions. Because of this impracticality, businesses are generally not required to adjust prior-year inventory balances. If prior-year inventory balances can be easily adjusted, those amounts should be altered to reflect the new valuation method.

Change in Inventory Valuation Method Disclosure Requirements

Financial statements are required to disclose all significant changes in accounting policies. This is done to comply with accounting’s full-disclosure principle. As a result, the business’s financial statements would need to inform prospective investors that there was a shift from LIFO to FIFO as well as detail what the effect of that shift could be.

Federal Tax Changes

If you plan on changing from FIFO to LIFO for tax purposes, you are required to complete Form 970 and comply with all requirements listed in the form. You must file the form with the return for the first tax year you plan on using LIFO. Switching to LIFO is irrevocable unless you gain permission from the IRS to switch to another method.