Question

he accounting method of LIFO, last in first out is one of the accounting methods used to manage inventories, as well as: FIFO, first in first out and the weighted average. The purpose of using LIFO is to move the oldest product first and avoids waste, specifically with time sensitive produces. In practice, LIFO is rarely used because a large portion of the inventory would become very old and obsolete. The reason companies use LIFO is the assumption that the cost of inventory increases over time which would affect the ending inventory balance. However, moving the of inventories to cost of goods sold the company reduces the level of profitability and is recognized through income taxes. Since income tax deferral is the only justification for most situations under LIFO, it is banned by the IFRS but allowed in the US under the approval of the IRS. The accounting method that is chosen is expected to be used consistently, however if a change is needed a request can be made to the IRS for review. If the new accounting method accurately reflects incomes and whether the new accounting system will shift profits and losses between companies are the areas the IRS will review during the approval process.

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