Volume 2, No. 4

 

LIFO Pranks: Soft White Underbelly Of A Conservative Accounting Technique:  The usual intent of companies using the LIFO inventory assumption is to lower income taxes and save cash during inflationary times. An additional benefit is that LIFO produces a more relevant cost of sales figure, and thus more relevant earnings. However, the LIFO costing assumption can also produce prankish results that aren't always noticed by financial statement users. Under certain circumstances, LIFO can inflate earnings as well as lower them vis-a-vis other inventory methods. Analysts and investors who aren't wise to the distortions that LIFO can produce in gross margins may develop forecasts and expectations that are based on a flawed understanding of the real economics in firms using this technique.

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