The Last-In, First-Out (LIFO) inventory method assumes the most recently added items are sold first, affecting COGS and tax liabilities. It's beneficial during inflation, aligning recent costs with revenues for a true profitability measure. However, LIFO is not accepted under IFRS, limiting its international use. Alternative methods like FIFO and weighted average cost offer different advantages and are chosen based on a company's specific needs.
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The LIFO inventory method is an accounting strategy that assumes the most recently added items to inventory are the first to be sold or used
Tax Benefits
LIFO can potentially lower a company's taxable income during times of inflation
Better Matching of Costs and Revenues
LIFO can provide a more accurate measure of current profitability by aligning recent costs with revenues
LIFO is commonly used in industries with volatile prices, such as bakeries and gas stations
The LIFO cost is calculated by subtracting the cost of inventory still on hand from the total cost of inventory purchased during the period
LIFO can be implemented through either a continuous or periodic inventory system, with the former providing immediate information on COGS and inventory levels
LIFO should be compared to other methods, such as FIFO and weighted average cost, to determine the best fit for a company's specific circumstances
LIFO can result in a higher COGS and lower net income, which can be beneficial during inflationary periods
LIFO may undervalue inventory on the balance sheet, as it is based on older, less expensive purchases
Companies must weigh the potential benefits and limitations of using LIFO, including its non-acceptance under International Financial Reporting Standards
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The (______) inventory method presumes that the most recently stocked items are sold or utilized initially.
Last-In, First-Out (LIFO)
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LIFO method impact during inflation
Results in higher COGS, reducing net income and taxes.
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Purpose of COGS calculation
Determines company profitability and tax liabilities.
