In performing a residual income valuation, inventories for companies that use LIFO should be put on a FIFO basis. Why? Please explain.

I have not read Residual Income in Equity yet, but from what I read about RI in Corp Fin is: RI is accrual accounting based measure of the returns from your investment. With definition being RI = NI - WACC x Capital In LIFO accounting, Inventories are reported at less recent costs on B/S, so they are understated. This reduces the ‘Capital’ figure in RI equation and thus overstates RI. Maybe this is the reason, why they need to be adjusted to FIFO basis, so that ‘Capital’ figure represents a more realistic value.

^ That’s it! Thanks, dude!