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Recent supply shortages may cause unexpected problems for some businesses that use the last-in, first-out (LIFO) method for their inventory. Here\u2019s an overview of what\u2019s happening so you won\u2019t be blindsided by the effects of so-called \u201cLIFO liquidation.\u201d<\/p>\n
Inventory reporting methods<\/strong><\/p>\n Retailers generally record inventory when it\u2019s received and title transfers to the company. Then, it moves to cost of goods sold when the product ships and title transfers to the customer. You have choices when it comes to reporting inventory costs. Three popular methods\u00a0are:<\/p>\n 1. Specific identification.<\/strong> When a company\u2019s inventory is one of a kind, such as artwork or custom jewelry, it may be appropriate to use the specific-identification method. Here, each item is reported at historic cost and that amount is generally carried on the books until the specific item is\u00a0sold.<\/p>\n 2. First-in, first-out (FIFO).<\/strong> Under this method, the first units entered into inventory are the first ones presumed sold. This method assumes that merchandise is sold in the order it was acquired or produced. Thus, the cost of goods sold is based on older \u2014 and often lower\u00a0\u2014\u00a0prices.<\/p>\n 3. LIFO.<\/strong> Under this method, the last units entered are the first presumed sold. Using LIFO usually causes the low-cost items to remain in inventory. Higher cost of sales generates lower pretax earnings as long as inventory keeps growing.<\/p>\n Downside of LIFO method<\/strong><\/p>\n LIFO works as a tax deferral strategy, as long as costs and inventory levels are rising. But there\u2019s a potential downside to using LIFO: The tax benefits may unexpectedly reverse<\/em> if a company that\u2019s using LIFO reduces its ending inventory to a level below the beginning inventory balance. As higher inventory costs are used up, the company will need to start dipping into lower-cost layers of inventory, triggering taxes on \u201cphantom income\u201d that the LIFO method previously has allowed the company to defer. This is commonly known as LIFO liquidation.<\/p>\n Retailers, such as auto dealers, that have less inventory on hand in 2022 may be facing this situation. Higher tax obligations could exacerbate any financial distress they\u2019re currently experiencing.<\/p>\n Fortunately, the House is currently considering legislation \u2014 the Supply Chain Disruptions Relief Act \u2014 that would provide relief to auto dealers affected by LIFO liquidation. Specifically, the bill would let them wait until the end of 2025 to replace their new vehicle inventory for purposes of determining income for sales in 2020 and 2021. Stay tuned for any progress on this proposed law.<\/p>\n For more information<\/strong><\/p>\n Accounting for inventory is one of the more complicated parts of U.S. Generally Accepted Accounting Principles. Fortunately, we can help evaluate the optimal reporting method for your business and discuss any concerns you may have regarding LIFO liquidation in today\u2019s volatile marketplace.<\/p>\n \u00a9 2022<\/em><\/p>\n <\/body> Recent supply shortages may cause unexpected problems for some businesses that use the last-in, first-out (LIFO) method for their inventory. Here\u2019s an overview of what\u2019s happening so you won\u2019t be blindsided by the effects of so-called \u201cLIFO liquidation.\u201d Inventory reporting methods Retailers generally record inventory when it\u2019s received and title transfers to the company. Then, […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13,7,10],"tags":[8,11,12],"class_list":["post-16076","post","type-post","status-publish","format-standard","hentry","category-aa","category-articles","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16076","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=16076"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/16076\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=16076"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=16076"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=16076"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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