In a period of rising prices, a company may want to use LIFO as it reduces...

In a period of rising prices, a company may want to use LIFO as it reduces their tax liability. Can you explain why that is the case? Also, can a company switch its use of inventory valuation methods from year to year?

Expert Solution

In the Situation of Rising prices, the procuring cost will be higher. Procuring cost is the purchase cost charged against revenue. Hence In case of LIFO method if current value of Inventory purchased at Higher value shall be sold first and inventory purchased earlier at lower than current market prices shall be counted in Closing stock.

The LIFO method cause goods procured recently or last in row are first issued hence charged to COGS first, and purchased earlier shall be left unissued and form part of closing stock.

Change in Method of Valuation of Inventory shall not account as and when you find relevant. You cannot simply change just get up from nightmare and change the valuation method.

As per Framework the following two conditions called for change:

- Lead to Better presentation

- Required by Statutory Regulation

On close proximity of the situation just change in prices changed the method accordingly as per their feasibility, and their ease, hence in such situation change required proper justification in Note to accounts.

Hence from above discussion it can be concluded that simply for lessen the impact of market effect shall not change the Method of Valuation. Unless it focus on above conditions. Secondly change on yearly basis will bring the entity in eyes of statutory regulators also. Like ROC , SEC, SEBI.

ekkarill92 answered 2 years ago

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