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.