Comparative Profit & Loss Accounts (LIFO/Weighted Average/FIFO)

Year Ended June 30, 2000

 

Item	LIFO	Weighted Average	FIFO
Sales	297,000	297,000	297,000
Less Cost of Goods Sold	162,000	160,000	158,000
Gross Profit	135,000	137,000	139,000
Less Operating Expenses	91,000	91,000	91,000
Operating Income	44,000	46,000	48,000
Less Interest Expense	12,000	12,000	12,000
Income Before Taxes	32,000	34,000	36,000
Income Taxes	13,000	14,000	15,000
Net Income	19,000	20,000	21,000

 

• Depreciation choices are mandated by law.
• But we have latitude in Financial Reporting!

In the above Profit & Loss A/c example, the ‘Straight-Line' (ST.L) Method has been used for reporting depreciation.

But what would have the effect of using:

• Double declining balance depreciation method? (DDB)
• On all the Inventory systems, (LIFO, W.A., & FIFO)?

 Operating costs included Rs. 10,000 of depreciation on Straight Line basis.

 

The following figures illustrate impact of using DDB method:

 

 

(Rs. In Thousands)

	A	B	C	D	E	F
Item	LIFO	W.A.	FIFO	LIFO	W.A.	FIFO
	ST.L.	ST.L	ST.L	DDB	DDB	DDB
Sales	297	297	297	297	297	297
Less Cost of Goods Sold	162	160	158	162	160	158
Gross Profit	135	137	139	135	137	139
Less Operating Expenses	91	91	91	99	99	99
Operating Income	44	46	48	36	38	40
Less Interest Expenses	12	12	12	12	12	12
Income before Taxes	32	34	36	24	26	28
Income Taxes	13	14	15	9	10	11
Net Income	19	20	21*	15*	16	17

 

There are six possible Net Incomes!

Each of the three inventory methods can be matched with both of the depreciation methods.

The company's reported net income can be greatly affected by the choice of accounting methods!

 

In this example, we can presume that two companies with identical operations, each report the incomes of (a) 15,000* (for a LIFO/DDB Company) (b) 21,000* (for a FIFO/ST.L. Company).

A difference of 40%!! can be obtained.

 

Who says Accounts/Finance People Aren't Creative?!