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Introduction

The choice of inventory costing method is an important one for companies since the consequence of the choice is apparent in both the balance sheet and the income statement. In periods of rising prices, companies choosing the income-reducing method of Last-in-First-out (LIFO) also leave the lower earlier prices in their inventory values.
This results in inventory values in the balance sheet that are based on the older prices and hence this understates the current assets of the company. Thus, in times of rising inventory prices, the LIFO method results in lower net incomes and also lower values in the current assets. The only advantage to choosing this method is the lower tax expenses based on the lower income. The American tax code requires the use of the LIFO method for financial reporting purposes if that method is used for tax purposes. When used for tax purposes, LIFO with its lower reported incomes correspondingly results in substantial tax savings for companies......

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Approximate Word Count: 1347
Approximate Pages: 6 (250 words per double-spaced page)

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