How does LIFO accounting work during inflation?

How does LIFO accounting work during inflation?

LIFO, or Last In, First Out, means that the most recently acquired inventory is sold first. During inflation, this can lead to lower taxable income because the higher costs of newer inventory are matched against current revenues.

What are the advantages of using LIFO in an inflationary environment?

The main advantages include reduced tax liability due to lower reported profits and better matching of current costs with revenues, which can provide a more accurate picture of profitability.

Are there any disadvantages to using LIFO?

Yes, disadvantages include potential inventory undervaluation on the balance sheet and the possibility of lower earnings reported, which might affect investor perception.

How does LIFO affect cash flow?

LIFO can improve cash flow in the short term by reducing tax payments, but it may lead to cash flow issues in the long run if inventory levels are not managed properly.

Is LIFO allowed under IFRS?

No, LIFO is not permitted under IFRS. Companies using IFRS must use either FIFO or weighted average cost methods for inventory accounting.