Would a large inventory purchase at FYE effect the income statement?

Question

If a company is using the LIFO method of costing inventory; Would a large purchase at the end of their fiscal year effect the income statement or would the purchase just be cancelled out by the fact that the inventory purchased would be added to the ending inventory? For example would it lower the net income or would the net income be unchanged by the purchase?

Answer 1

Yes it would alter the income statement and balance sheet, but only if the periodic inventory method is used and the material is significantly different in price.

When using the LIFO method of costing and the Periodic Inventory tracking method, a large inventory purchase could drastically effect the income statement.

The Periodic Inventory Method does not account for when inventory was purchased vs used...other than during the period.  Therefore, the last material purchased during the period would be the first used to determine the cost of goods.  If the material was significantly cheaper or more expensive, it would alter the income statement accordingly.

The Perpetual Inventory Method calculates cost of goods on a continuous basis when material is used.  Therefore, only the last material purchased when the inventory was pulled for use would determine cost of goods.

Using the FIFO inventory method (regardless of Perpetual vs. Periodic Inventory method) also would prevent this new material from having any effect on the income statement.

Therefore if a manager wants to manipulate the income statement, he/she can make last minute purchases to do so under LIFO and Periodic inventory methods combined.  This may be done to meet budgets or as a method to move up the corporate ladder while having little real effect on corporate profits in the long run.

On the other hand, if cheaper materials were available only at the end of the period...a manager smart enough to take advantage of such a deal should be rewarded for such wise purchases.  Otherwise, a new manager next period would have suddenly lower cost of goods even though he/she did nothing.

Make sense?