Hey Guys, Was hoping you could shed some light… If companies under LIFO hold excess reserves inorder to benefit from taxation, surely if companies used FIFO and held zero reserves the taxation result would be the same as if one used the LIFO method without liquidating their reserves? Could this be correct? Thanks
The tax benefits flow through under LIFO where prices are inflating as a result of lower pre-tax income. They dont hold excess LIFO reserves in order to benefit from taxation, but rather avoid extended LIFO liquidation as this results in higher reported income. FIFO in a market of rising prices does not result in lower tax.