Question

FIFO Holding Gains What are they, and what do analysts do with them?

Answer 1

The main benefit of the FIFO Method is that by using the shares you acquired first, you're more likely to get long-term Capital Gain treatment for any profits that you earn.That means that your taxable gain could be higher than it would be on other shares you've owned for a shorter period of time.

The first-in, first-out method is the default way to decide which shares to sell. Under FIFO, if you sell shares of a company that you've bought on multiple occasions, you always sell your oldest shares first.

Analysts Will analyse the Financial Position of the company...

Like,Materials flow, Inflation, Deflation, Financial reporting, Record keeping, Reporting fluctuations etc,.

let us Discuss about one by one

Materials Flow : In most businesses, the actual flow of materials follows FIFO, which makes this a logical choice.

Inflation : If costs are increasing, the first items sold are the least expensive, so your cost of goods sold decreases, you report more profits, and therefore pay a larger amount of income taxes in the near term.

Deflation : If costs are decreasing, the first items sold are the most expensive, so your cost of goods sold increases, you report fewer profits, and therefore pay a smaller amount of income taxes in the near term.

Financial reporting : There are no GAAP or IFRS restrictions on the use of FIFO in reporting financial results.

Record keeping : There are usually fewer inventory layers to track in a FIFO system, since the oldest layers are continually used up. This reduces record keeping.

Reporting fluctuations : Since there are few inventory layers, and those layers reflect recent pricing, there are rarely any unusual spikes or drops in the cost of goods sold that are caused by accessing old inventory layers.