Inventory Valuation Methods: LIFO vs. FIFO - A Tax Benefit Dilemma

In my point of view, the opinion of sales person is right if the company uses the LIFO inventory system then the inventory at end is understated but the COGS is overstated due to this effect company reported lower net income and then the lower tax percentage is applied on company’s income. It is concluded that the use of LIFO is beneficial for the company and it is often viewed that the management of the company uses LIFO technique in the company’s favor.

I suggest that the analysis of Spielbug is right and the analysis of Meadow is wrong.

The main reason behind is the price fluctuation in the oil prices market makes an impact on the inventory level (Meigs, 1999). If the management uses the LIFO inventory valuation technique then the company’s COGS reported at the higher which in the end reduces the net income of the company and company receives maximum tax benefit from the LIFO method.

Get quality help now

Sweet V

Verified writer

Proficient in: Taxation

4.9 (984)

“ Ok, let me say I’m extremely satisfy with the result while it was a last minute thing. I really enjoy the effort put in. ”

+84 relevant experts are online

Hire writer

It is the reality that use of LIFO method curtails the net income of the company due to this effect less tax percentage is imposed on the net income. It means that the company is receiving the maximum tax benefit from the LIFO method.

The main pros of LIFO is the tax benefit but it has more cons than pros like it makes the stock prices of the company slightly vulnerable, brings negative impact on company’s dividend policy structure, on goodwill, growth etc. But on the other hand, if the company uses the FIFO accounting method it brings greed to the company’s asset, equity position etc.

FIFO portrays that the company uses its assets at its full command and also reflected that the company is adopted the efficient inventory management practice (Meigs, 1999).

Although, under FIFO technique company cant take the tax benefit due to the higher net income but it brings the positive impacts on the company’s stock prices, dividend etc. So, in my point of view if the company wants to strengthen its business then the management should adopt the FIFO inventory valuation technique. Moreover, it also brings a positive impact on the company’s current ratio, working capital, inventory turn over etc.

Reference

1. Meigs, Robert F. , Mary A. Meigs, Mark Bettner, Ray Whittington. Accounting: The basis for Business Decisions. 10. McGraw Hill