Sunday, October 14, 2012

LIFO or FIFO? Which one is preferable?

In the inflationary situation which method of inventory valuation would you prefer, LIFO or FIFO? 

In the accounting procedure of a firm’s inventory valuation there are two well known methods, which are widely used. The methods are LIFO shortened for “Last in first out” and FIFO elaborated as “First in first out”. The consideration of any of these methods in the inventory valuation process affects not only the value of inventory but the entire procedure from the value of inventory to the income tax calculation is influenced.

What are the disclosures required for marketable securities?

For the marketable securities the following disclosures are required – 

  • Aggregate cost and market value of the separate portfolios as of the balance sheet date, with identification as to which is the carrying amount.
  • Gross unrealized gains or losses related to market value over cost or cost over market value for all marketable equity securities in the portfolio.
  • Net realized gain or loss included in income determination, the basis on which cost was determined and the change in the valuation allowance that has been included in the equity section of the balance sheet during the period and, when a classified balance sheet is presented, the amount of such change included in the determination of net income.

State the disclosures about fair value of financial instruments?

As part of its overall consideration of financial instruments, the FASB issued SFAs 107 (1991) on disclosures about the fair value of financial instruments. It requires that - 
Disclosure about fair value of financial instruments

“An entity shall disclose, either in the body of the financial statements or in the accompanying notes, the fair value of financial instruments for which it is practicable to estimate that value. An entity also shall disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments.” 
For trade receivables and payables, no disclosure is required when carrying amount approximates fair value.

If you need you can find out who are the users of Financial Statements...

Who are the users of financial statements?

What are the objectives of financial statement analysis? OR,

Why is financial statement analysis important?

Financial statement is the art and science of detailed examination of different items. In the financial statements mainly balance sheet and income statements. The main objectives of financial statement analysis are to have an in-depth understanding of the financial information presented in different financial statements for decision making.

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