Remember: the LIFO method assumes that the company is selling the most recent stocks and what remains in inventory has a lower inventory value. It is estimated by savelifo. Switching to the LIFO method used for actual physical flow of inventory. The benefits can be seen as such: —. As opposed to Small Medium Enterprises, the multinational companies or public listed companies has less incentive to maintain a LIFO inventory valuation.
Firstly, the only accounting standard U. The fact remains that maintaining multiple accounting methods across countries requires more human resources and therefore costlier to maintain. Nicor Inc is involved in a case with the SEC by utilizing low price reserves and recognize it as an actual cost of goods sold. The fact of the matter is, although the last inventory purchased may be at a higher price, the corporation has utilized its low-priced inventories and tagged it as the most recent inventory price.
Even large oil conglomerates such as Exxon-mobile are allegedly misrepresenting its profits with the LIFO valuation method. The trigger point is when the gasoline price was at its highest point in , the company has posted record profits that are the highest in its history. The underlying question is, why small-medium enterprises are religiously petitioning to maintain the LIFO method as a valuation method, whereas the large, listed companies are using the LIFO method to report higher earnings.
The answer lies with the involved stakeholders. The inherent tax benefit from having a higher cost of goods sold valuation is preferred. As a physical flow method there are also disadvantages of organizing a warehouse with LIFO flow in mind.
The modern warehouse that we see today is not geared towards the use of the LIFO inventory flow method. In fact, there are not many third-party outsourced warehouses that cater to commodities that require the LIFO physical flow inventory system. So, unless a company does its inventory storage in-house, and a company has a specific type of inventory that makes LIFO a preferable inventory method such as oil, metal commodities, scrap metal, etc… It is not feasible for a warehouse to approach inventory control with the LIFO method.
On top of that, we have to be mindful that no one can accurately predict the price of inventories in the long run. Sure, certain measures can be taken such as purchasing futures, hedging commodities, and vendor price re-evaluations to maintain a more predictable and steadier inventory value.
But in our opinion, when comparing the LIFO, FIFO, and even the weighted average inventory cost valuation method, there is no evidence that one method is better than another. The only reason why, we believe, that IFRS has disallowed the use of the LIFO valuation method is only because major corporations are using this method to misrepresent its financial reporting.
I'm Kelvin, I work as a custom broker and I'm thrilled with having the experience to share my industry knowledge with you. Choosing an inventory method for a company is more than an accounting formality. Settling on either LIFO or FIFO as an inventory valuation method can affect the appearance of a company's income, strategic planning and tax liability. The best method for a business depends on its goals and current financial position.
LIFO stands for last in, first out, which is indicative of how the inventory method works. When evaluating inventory sales, LIFO assumes that the most recently acquired inventory is the inventory sold.
The biggest benefit of LIFO is a tax advantage. During times of inflation, LIFO results in a higher cost of goods sold and a lower balance of remaining inventory. A higher cost of goods sold means lower net income, which results in a smaller tax liability. The benefit 1, 2 and 3 described above are the main arguments of the widespread employment of this method. The LIFO method reduces reported earnings during the periods of inflation.
Under LIFO method, the balance sheet inventory figure is usually understated because it is based on the oldest costs. Due to understatement of inventory, the working capital position may look worse than it really is. The LIFO liquidation may inflate the reported income for a given period that results in higher tax payments for the period.
To avoid this problem, a company may purchase goods in large quantities with the intention to match them against revenues. Therefore, the adoption of LIFO may develop poor buying habits among companies. A company using last-in, first-out LIFO method can easily manipulate its reported earnings for a period by changing its purchase pattern at the end of the year.
Information is presented in a very understandable manner,……. Try to explain in a simple word for one to understand more, thanks your information is well presented. What are the disadvantages of LIFO method in relation to taxation? Good work and interesting. But is it possible to use LIFO method for products that have specific expiring date?
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