cyber21

Thanks guys.

jimmykaw, in your example you have provided Feb income, which in fact has opposite effect (higher taxes) because the LIFO includes the earlier cheaper inventory.

Here is an example I was thinking of:

Cost/widget
Month 1 - $40
Month 2 - $50
Month 3 - $60

Price/widget
Month 3 - $80
Month 4 - $80

Let's say 2 widgets were sold

Under FIFO
$80 - $40 = $40
$80 - $50 = $30
Total Inc = $70

Under LIFO
$80 - $60 = $20
$80 - $50 = $30
Total Inc = $50

Under LIFO, COGS are higher therefore low income - thus, lower taxes.

However, for the the same example let's change gross margin:

Cost/widget
Month 1 - $40
Month 2 - $50
Month 3 - $60

Price/widget
Month 3 - $80
Month 4 - $100

Let's say 2 widgets were sold

Under FIFO
$80 - $40 = $40
$100 - $50 = $50
Total Inc = $90

Under LIFO
$80 - $60 = $20
$100 - $50 = $50
Total Inc = $70

So, the conclusion is that the LIFO reserve is exactly the same whether the profit margin is constant or increasing (assuming the cost is increasing) and that not all inventory is taken into account, i.e. assume some inventory is tied up into asset.

Does this make sense at all?

Any accountants in the house?