1. Tangier Company should reflect on a couple different aspects when choosing whether the FIFO method or the LIFO method would be best for the financial reporting of the company. One thing for the company to look at is the increase of the units as units are purchased. By this I mean, an item may cost $0.50 per unit this month but next month may cost $0.75 per unit. In this case, if the company used the FIFO method, it would show a lower cost of goods sold amount. In return, it would also show less in sales but more in expense. If the company chooses the LIFO method, the cost of goods sold would be higher and the expenses would be lower since the newly purchased items were the ones sold. It would show on the statements that the current inventory is lower as well since the cheaper bought items are remaining.

When thinking about tax purposes, it would be best for the company to choose the LIFO method. Inventory cost is less therefore there would be less to pay taxes on. This would be smart for any items that have a prices that gradually raises each order. The FIFO method would not be ideal due to it causing more cost for the company owed in taxes.

When wanting to appeal more to creditors and investors, it would be smart to choose the FIFO method due to it showing more inventories and the rise of the prices. This will show that there is supply and demand in play and room for profit. If the company is able to show that they are able to purchase new items at a larger price and sell for a profit consistently, investors might take part in the company. Creditors will also see that the company is a good risk when the company is seeking credit accounts.

Some ways to simplify the LIFO method would be to group the inventory into pools. Each pool would have items similar in physical makeup. This would help the company when recording transactions since there would be less inventory choices to choose from. Since all of the inventory sold or bought is reported at the same time, it is simpler to place like items together into designated categories.

Another way to simplify the LIFO method is by using the Dollar-Value method. This method views the inventory as a value instead of physical number of goods. This method uses values of the times in the inventory over different years. This would simplify the reporting of goods sold since it could be difficult to know how much each item is valued at each time.

2. Greetings,

Dear Mr. Meeks,

Per your request, I have compiled several factors pertaining to the choice between LIFO and FIFO. As you may be aware, LIFO and FIFO are cost flow assumptions and not product flow assumptions.

Benefits of using LIFO (Last in - first out) method:

LIFO is that the last items purchased are the items sold first, meaning that the more expensive items were used. Therefore, the cost of goods sold is relatively higher and the value of goods on the balance sheet is lower because those are older items that were purchased at a lower price. Under LIFO, net income will be lower; therefore the income tax reported will be lower in periods when prices are rising.

Benefits of FIFO (First in - first out) method:

FIFO is that the oldest inventory is sold first, resulting in a lower cost of goods sold. The ending inventory is valued at the cost closest to the current cost because prices tend to increase over time. The cost of goods sold is based on a lower cost since older items are assumed sold first. FIFO will produce a lower ending inventory.

Whether it will be LIFO or FIFO that produces the highest or lowest value of cost of goods sold and ending inventory depends on the pattern of the actual unit cost changes during the period. (Spiceland, 2011). Another factor to consider is the LIFO conformity rule which is used to obtain tax advantages in periods of rising prices.

"If a company uses LIFO to measure its taxable income, IRS regulations require that LIFO also be used to measure income reported to investors and creditors" (Spiceland, 2011).

If you feel that inventory costs will remain stable or increase, then the LIFO method probably makes sense because it provides a deferred tax advantage.

However, LIFO also produces a weakness in the balance sheet since the inventory value will be lower.

Sincerely,

BB Consultants