Costs and Benefits of the LIFO-FIFO Choice
Document Type
Article
Publication Date
7-2024
Publisher
Wiley
Source Publication
Journal of Corporate Accounting & Finance
Source ISSN
1044-8136
Original Item ID
DOI: 10.1002/jcaf.22712
Abstract
The choice of inventory cost flow assumption is a key financial reporting decision. The resurgence of inflation has renewed interest in this option. We derive algebraic models of the LIFO-FIFO difference in cost of goods sold and the LIFO tax savings as a function of inflation, turnover, inventory increments, and tax rates. Managers and researchers can use these models to estimate the likely financial and tax impacts of LIFO adoption. Historic trends in public company LIFO usage since 1971 are consistent with the changing impacts estimated by our model. We infer an approximate cost level of using LIFO based on historic public company behavior. In the 1971–2022 period, LIFO adoptions were only common when the tax benefit in our model exceeded about 0.35% of COGS. Even when inflation rose in 2021 and 2022, the tax savings remained below this threshold, and there were far more LIFO abandonments than adoptions.
Recommended Citation
Ling, Qianhua and Tinkelman, Daniel P., "Costs and Benefits of the LIFO-FIFO Choice" (2024). Accounting Faculty Research and Publications. 151.
https://epublications.marquette.edu/account_fac/151
Comments
Journal of Corporate Accounting & Finance, Vol. 35, No. 3 (July 2024): 11-20. DOI.