Cash Discounts, FIFO, and LIFO
Response to the following problem:
AICPA Adapted Taylor Company, a household appliances dealer, purchases its inventories from various suppliers. Taylor has consistently stated its inventories at the lower of cost (FIFO) or market.
Required
1. Taylor is considering alternate methods of accounting for the cash discounts it takes when paying its suppliers promptly. From a theoretical standpoint, discuss the acceptability of each of the following methods:
a. Financial income when payments are made.
b. Reduction of cost of goods sold for period when payments are made.
c. Direct reduction of purchase cost.
2. Identify the effects on both the balance sheet and the income statement of a company using the LIFO inventory method instead of the FIFO method over a substantial time period when purchase prices of household appliances are rising. State why these effects take place.