LIFO and FIFO Accounting Methods

Paper Summary:

This paper explains that, in inflationary times, LIFO users will report higher cost of goods sold and, hence, less taxable income than if they used FIFO. The author points out that the system of LIFO has the potential to encourage merchandise to pile up in warehouses, and most countries outside the U.S. largely reject it as an option for public companies. The paper relates that Wal-Mart and Target, both year-round, discount, retail operations not subject to seasonable flux or to the dangers of perishable goods, use the LIFO accounting methodology.

Table of Contents
The Impact of the Financial Statements
The Impact on the Firm's Current Ratio
The Method Used by the Company's Major Competitor or the Industry as a Whole
Does LIFO Make Sense for this Company?

From the Paper:

"When calculating an inventory under the FIFO method, the inventoried goods sold are the oldest produced or purchased by the company. LIFO uses the opposite method. Instead, the inventoried goods sold are the goods most recently produced or purchased. LIFO suggests that companies always want to sell their newest inventory, even if they still have old stock sitting around. Lofton points out that "LIFO's a very American answer to the problem of inventory valuation," because in times of rising prices, it can lower a firm's taxes through generating figures of lower taxable income."

More papers on LIFO and FIFO Accounting Methods:

• Research Paper # 6800 : "The Effects of Changing from FIFO to LIFO on the Stock Market"
• Analytical Essay # 128220 : "Financial and Managerial Accounting"
• Essay # 65180 : "U.S. and International Accounting"

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