Guys, a quick question… What would be considered the more conservative accounting practice LIFO or FIFO? The other question i had is that companies would rather use lifo and as apposed to fifo due to the tax benifits created, however if a company uses lifo its net income would be lower than that of fifo…right. So why would a company choose lifo if they could reinvest the net income receive form fifo at higher rate than what they would have saved in taxes? Thanks
When doing analysis you would want to use: LIFO COGS/FIFO Inventory That would be the most accurate measure. Also, using LIFO is a deferral of taxes and profits. It’s important to remember that these are just accounting measures and not cash flow changes. The company still has the money, it’s just how they report it and pay tax on it that’s different. By choosing LIFO the company actually holds on to money longer than if using FIFO.
Thanks Jdane, you’ve rekindled my memory…makes perfect sense.
And conclusion?
Are we still taking the hold on tax from lifo as a conservative choice?
Conservative : lower net income this year, higher net income in later years.
Aggressive : higher net income this year, lower net income in later years.
When costs are rising (and assuming no LIFO liquidation), LIFO is more conservative (newer, higher costs in COGS, lower net income this year), FIFO is more aggressive (older, lower costs in COGS, higher net income this year).
When costs are stable, LIFO and FIFO are equally aggressive/conservative.
When costs are falling, LIFO is more aggressive, FIFO is more conservative.
Perfect, thanks again,
My pleasure.