Advantages and Disadvantages of LIFO Method

LIFO is the method of inventory valuation which refers to for last-in first-out, implying that the most recently produced items should be sold first and those which are produced earlier are sold last. Here are some of the advantages of using LIFO method –

1. When the company uses the LIFO method cost of the raw materials used for producing good is nearer to current market price and therefore it gives the current market price of the product.

2. In a period of inflation when prices are increasing, LIFO will show the correct profit and thus helps the company in not paying unduly high taxes since if company had used other method it will lead to low material cost but higher selling cost due to inflation which will lead to higher profits which attracts high tax from government.

3. During the period when prices are falling use of LIFO method does not show double profit in the income statement yet the finished product appears at market prices.

Given below are some of the disadvantages of using LIFO method

1. Calculations under LIFO system become complicated when frequent purchases are made at highly fluctuating rates.

2. Income tax authorities may not accept this method as it leads to effectively company paying lower tax than actual and therefore may lead to some trouble for company using LIFO method.

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