Summit Distributors
Questions
1. If you were Kathy Hutton, what would you do?
2. If you were Dave Flanders, would you recommend staying with the LIFO inventory-valuation method or switching to FIFO? Why? What are the cash flow ramifications of the accounting change?
3. If there were no cash-flow consequences associated with the accounting change, would you change your answers to questions 1 or 2?
4. How does the decision facing Kathy Hutton impact Summit Distributors' other constituencies, such as Prime Trust Bank, shareholders, auditors, and the company's internal financial reporting group?
5. Dave Flanders had not been employed by the company four years earlier. However, he was aware that at that time the company had switched inventory valuation methods for most inventory from FIFO to LIFO. The company's 1988 annual report justified the change as follows:
The Company believes the LIFO method of accounting will result in a more representative presentation of the Company's financial position and results of operations.Does the fact that Summit Distributors switched methods four years ago change your answers to questions 1 or 2?
6. When companies change accounting methods, managers and auditors are required to justify the change. Their justification must explain why the new method is preferable to the old method. What are the potential justifications for Summit's managers changing to FIFO from LIFO?