Summit Case Analysis

Summit Case Analysis

  • Submitted By: be17forever
  • Date Submitted: 02/15/2009 12:56 PM
  • Category: Business
  • Words: 1503
  • Page: 7
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Case 12: Summit Distributors

1. If you were Kathy Hutton, what would you do?

For Summit Distributors, inventory represents a large portion of assets and, as such, makes up an important part of the balance sheet. It is, therefore, crucial for Kathy to pick the accounting policy that will result in the best outcome for the company in the long run not just for the next year. The accounting method that a company decides to use to determine the costs of inventory can directly impact the balance sheet, income statement and statement of cash flow. The following table summarizes the pros and cons of each approach:

|FIFO (assuming rising inflation) |LIFO |
|Increases reported Income |Decreases Reported income |
|Increases Taxes |Decreases Tax |
|Increases Inventory value |Decreases Inventory Value |
|reduces cash flow |Increases cash flow |

In periods of rising costs the LIFO method decreases the value of ending inventory compared to the FIFO method. Lower ending inventory results in higher cost of goods sold which in turn lowers taxable income and the tax liability businesses must pay. This allows companies to use the tax savings to reinvest in their businesses. In summary, the LIFO inventory method, similar to other accounting expenses such as amortization and depreciation, increases a company's cash flow by reducing income and tax liability. Given that the company already switched to LIFO in the past (1988), returning to FIFO at this time will be viewed by shareholders and the market as a way to cover up financial...

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