Accounting Department Memorandum To: Executive Vice President From: Yvonne Dixon and Teammates Subject: Last In/First Out (LIFO) versus First In/First Out (FIFO) Date: February 13, 2012
Dear Executive Vice President, Our team recently had a meeting to discuss the LIFO and FIFO methods of inventory for the Cost of Goods Sold (COGS), addressing our company's specific needs. The discussion effectively communicated important information and we have collaborated as a team to provide you with the best possible information to present to the board.
After consulting with the board, we kindly request your input on the provided information in order to make a decision. Given the current economic inflation, it would be wise to persist with LIFO as it has the potential to reduce our federal and state corporate income tax, while simultaneously
...enhancing cash flow and profit margins.
Research and discussions have been conducted regarding the impact of the current economic situation on our Cost of Goods Sold (COGS) in both short and long-term periods, as well as the reasons for the increase in inventory costs. It is crucial to consider whether to use LIFO (Last In, First Out) or FIFO (First In, First Out) for our inventory method as it will affect our Profit and Loss Statements. If expenses increase next year, switching to FIFO might be a wise choice. However, if expenses remain unchanged, it is recommended to stick with LIFO.
The LIFO method reduces income on the income statement as a result of higher COGS and decreases inventory value on the balance sheet. In contrast, the FIFO method increases income displayed on the income statement due to lower COGS and raises inventory value on
the balance sheet. It is important to consistently apply whichever method is selected for both the remainder of the current year and the upcoming year.
Our company acknowledges the needs of the industry and modifies pricing accordingly in order to sustain profitability. Nevertheless, it will be challenging to raise prices enough to compensate for the projected rise in cost of goods sold (COGS) next year. It is crucial to remember that our financial reporting must also reflect the chosen inventory method. We would like to express gratitude to Yvonne Dixon and her team.
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