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What is the advantage for companies using a LIFO reserve account on the balance sheet?

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Andrew Williams
Title: Controller
Company: KECdesign, LLC
(Controller, KECdesign, LLC) |

The short answer is taxes. In an environment of rising prices using LIFO results in a lower ending inventory value and a higher cost of goods for the period, resulting in lower reported income for the period. You could also say that LIFO gives a better picture of the income statement while FIFO gives a more accurate picture of the Balance sheet.

I have worked with companies that have used LIFO and the biggest disadvantage is educating the users of the financial statements. Many times they are comparing the company, or setting loan covenants against companies on FIFO. If the goal is comparable financial statements, I think IFRS is on the right track by not allowing LIFO.

Hope this helps.

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