FIFO and LIFO accounting Methods are means of managing inventory and financial matters involving the money a company tied up within inventory of produced goods, raw materials, parts, components, or feed stocks. FIFO stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first. LIFO stands for last-in, first-out, meaning that the most recently purchased items are recorded as sold first. Since the 1970s, U.S. companies have tended to use LIFO, which reduces their income taxes in times of inflation.[1]
LIFO liquidation
Notwithstanding its deferred tax Deferred tax is an accounting concept, meaning a future tax liability or asset, resulting from temporary differences between book value of assets and liabilities and their tax value, or timing differences between the recognition of gains and losses in financial statements and their recognition in a tax computation advantage, a LIFO inventory system can lead to LIFO liquidation, a situation where in the absence of new replacement inventory or a search for increased profits, older inventory is increasingly liquidated (or sold). If prices have been rising, for example through inflation, this older inventory will have a lower cost, and its liquidation leads to the recognition of higher net income and the payment of higher taxes, thus reversing the deferred tax advantage that initially encouraged the adoption of a LIFO system. Some companies who use LIFO have decades-old inventory recorded on their books at a very low cost. For these companies a LIFO liquidation results in an inflated net income (and higher tax payments). Companies can use liquidations to manage their earnings.
Also mobile telecom operators either use FIFO or LIFO to allocate remaining call credit a customer did not fully use in a billing period. In telecom terms FIFO is good for the customers while LIFO is good for the telecom operator. With small amount of carry over duration, call credit is to be lost sooner with LIFO then with FIFO as a customer first uses his old call credit( that he had left from previous month) rather then first needing to use all the new credit before using the old call credit.
See also
References
- ^ Gibson SC. (2002). LIFO vs. FIFO: a return to the basics. The RMA Journal. Free full text.
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