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CASE 6-2 RISING PRICES, A TIME TO SWITCH OFF LIFO?
CASE 6-2 RISING PRICES, A TIME TO SWITCH OFF LIFO? The following information was taken directly from the annual report of a firm that wishes to remain anonymous. (The dates have been changed.) FINANCIAL SUMMARY Effects of LIFO Accounting For a number of years, the corporation has used the last-in, first-out (LIFO) method of accounting for its steel inventories. In periods of extended inflation, coupled with uncertain supplies of raw materials from foreign sources, and rapid increases and fluctuations in prices of raw materials such as nickel and chrome nickel scrap, earnings can be affected unrealisti- cally for any given year.
Because of these factors, the corporation will apply to the Internal Revenue Service for permis- sion to discontinue using the LIFO method of accounting for valuing those inventories for which this method has been used. If such application is granted, the LIFO reserve at December 31, 2011, of $12,300,000 would be eliminated, which would require a provision for income taxes of approximately $6,150,000. The corporation will also seek permission to pay the increased taxes over a 10-year period. If the corporation had not used the LIFO method of accounting during 2010, net earnings for the year would have been increased by approximately $1,500,000. The 2011 annual report also disclosed the following: 2011 1.
