CFP

Tax Accounting - Inventory Valuation and Flow Methods

Inventory Valuation and Flow Methods
The choice of a basis method can have a significant effect on the amount of taxable capital gains and capital losses in a given tax year, when you sell shares of a security. Common Costing Conventions:

FIFO (first-in, first-out) – Inventory that was obtained/produced first is moved out first

  • FIFO Characteristics: Increased earnings, greater tax liability, current cost inventory
LIFO (last-in, first-out) – Inventory that was most recently obtained/produced is moved out first

  • During a period of rising prices, firm's advantage to adopt LIFO
  • LIFO Characteristics: Reduced earnings, deferral of taxes, understated inventory




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