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    Nikki4's Avatar
    Nikki4 Posts: 4, Reputation: 1
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    #1

    Mar 16, 2007, 08:12 AM
    LIFO cost flow
    What is one of the reasons for selecting the LIFO cost flow assumption instead of the FIFO cost flow assumption in an inflationary economic environment?

    Would it be that income taxes will be lower? Net income will be higher? Higher selling price can be established?
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #2

    Mar 16, 2007, 03:46 PM
    On Jan 1 I buy 100 units at $3/unit for a total of $300.

    On Jan 23 I buy 100 units at $12/unit for a total of $1,200

    My total inventory value after January 23 purchase is $1,500


    On Jan 25, I sell 100 units.

    Under FIFO, I would sell the inventory at $300, having expenses of $300

    Under LIFO, I would sell the $1,200, having expenses of $1,200

    Therefore, LIFO increase expenses, and therefore lowers net income and lowers taxes payable.

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