According to Schweser, LCM can’t be used for tax purposes if the firm is using LIFO.
Can someone explain to me why? I thought LCM was used regardless of LIFO or FIFO or Average Costing.
I believe LCM can be used with LIFO, FIFO, or Avg cost methods for financial reporting, but it cannot be used with LIFO for TAX reporting purposes. Why? Using LIFO allows you to report higher (and more accurate) COGS and less taxable income. With less taxable income you pay less in taxes as inventory prices are stable or increasing. If inventory prices declined and you could use LCM, you would also be able to write off inventory costs, again this translates to less taxes paid. So if you could use both methods at the same time when reporting taxes, a firm would benefit from both rising and falling inventory prices, from a tax standpoint.
I just started this reading last night, can someone confirm or correct? Thanks…
culley, I was thinking the same thing, but to be sure I cracked open my 2006 CFAI official curriculum, Volume II, p.755 (which by the way brought horrible memories flooding back…)
Here’s an exerpt.
“LCM can be used with LIFO for financial statement purposes. However, for tax purposes LIFO cannot be combined with LCM. Firms using LIFO cannot recognize (and obtain tax benefits from) writedowns and declines in market value for tax purposes.^4”
“Otherwise, the firm could have the best of both worlds and obtain tax savings whether costs were rising or declining.”
culley earns a Stephen Colbert “tip of the hat”, I know lola’s jealous ;)
> culley earns a Stephen Colbert “tip of the hat”, I
> know lola’s jealous ;)
you bet :)
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