During 2015, Crop-Paper-Scissors, a craft store, began operations and chose to use the FIFO inventory costing method.

After creating their financial statements for 2015, the company realized that it would prefer to use the LIFO inventory costing method instead.

So, Crop-Paper-Scissors switched to the LIFO method in 2016.

Due to a change in the economy, the company realized that it would, in fact, be better for them to use the FIFO method.

So, in 2017 they switch back to FIFO. After analyzing the swing in the numbers over the past few years, they decide to smooth things out a bit by trying average costing in 2018.

1. What impact(s) will these actions have on the companys financial statements? Be sure to discuss the balance sheet and the income statement separately, and be specific about the impacts on each statement (i.e. overstatement/understatement of account balances and net income).

2. How does FIFO impact the balance sheet? The income statement?

3. How does LIFO impact the balance sheet? The income statement?

4. What are the advantages of switching inventory methods (i.e. why is Crop-Paper-Scissors doing this)?

5. Discuss the role that accounting should play in this situation. Which GAAP principle(s) are being violated?

6. Discuss the ethical issues in this case (be sure to identify each party involved and whether or not they are acting in an ethical manner). Identify who could be harmed and how they could be harmed (be specific). Do not include the individuals at Crop-Paper-Scissors who made the decision, created the financial statements, or filed the taxes. As a personal friend, what advice would you give to the accountant who works for Crop-Paper-Scissors?