Why would a company switch to the LIFO method of inventory valuation in an inflationary period?

Question

This question is related to accounting anf financial statements.

Answer 1

to give a more accurate reflection of current inventory replacement costs... or cause FIFO sucks a big wet one.

Answer 2

redwine is correct.

Let me elaborate. LIFO (Last In, First Out) is a method of costing based on the logic that when raw material is taken out of inventory, whatever went in last is the first to be taken out when needed for manufacture. Therefore, cost of inputs (raw material) is taken to be the price paid for the latest purchase of raw material.

In an inflationary period, the latest price will be the highest price paid for raw material. Thus, by using the highest price of input in calculating cost of production, the total cost of production increases. This affects book profits, enabling the company to show a lower profit and thus reducing the tax liability on profits (less profit = less tax to be paid).

Answer 3

Lower tax liabilty. Higher expenses = less EBT, = less tax liability. That is the most common reason to go LIFO accounting.