joemoran

MLAMOTHE Wrote:
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> Correct me if I'm wrong, but it doesn't matter if
> the selling price of the final product increases
> or decreases. The question at hand is whether
> LIFO decreases income taxes COMPARED to FIFO in a
> COGS inflationary environment. Therefore, no
> matter whether the final product selling price is
> going up, down, or staying the same, as long as it
> is standardized between FIFO and LIFO, LIFO will
> always create lower income taxes in a COGS
> inflationary environment. Correct?

Correct. The idea is to compare LIFO vs FIFO for ANY given Sales price.

dece2011

Yes, agreed that the emphasis is on inflationary COGS during LIFO in comparison to FIFO. However, there should be a caveat that selling prices should be constant in each period in order to achieve income tax cost savings for the LIFO period.

A simple example: let's say there are 2 widgets

Cost
widget A- $5
widget B: $7

Selling Price
All widgets- $10

-----------------
FIFO EBT: $5
LIFO EBT: $3

Lower income earned during LIFO hence less taxes paid.

Now, let's say the upward pressure on costs have driven the firm to raise prices to keep 50% gross margin (during LIFO), so instead of the constant selling price we have:

Selling Price
widget A- $10
widget B- $14

which translates to the following EBT:

FIFO EBT: $5
LIFO EBT: $7

Higher income earned during LIFO hence higher taxes paid.

Conclusion: Inflationary COGS during LIFO does lower income taxes given the selling price is either constant or decreasing.

Is there a flaw in my analysis.