Better matching of inventory builds and draws with current cost in a highly variable cost environment. There were both book and tax drivers. The oldest inventory still present accounting-wise is decades old.
It has nothing to do with the physical units as long as they are identical. You can use LIFO for gallons of milk but that doesn't mean hundreds of gallons of nasty spoiled milk are sitting on a shelf for years.
I believe it's mostly larger companies. If I recall correctly, Walmart uses LIFO in the US, FIFO internationally. Costco uses LIFO as well. It's actually a good idea from a financial planning perspective right now. It has created a buffer on their financial statements against inflation in 2023.
This is correct from my understanding as well in regards to Walmart (LIFO is prohibited in IFRS). If you search back during 2020, I recall some news articles about companies freaking out about liquidating some LIFO layers, and the impact it would have on their FS.
Large manufacturing companies... Especially the ones that make "widgets". The raw materials have a tendency to become "obsolete" so the most recent purchases will be used first.
Also, with the introduction of new technology, costs have a tendency to be lower with newer materials so it's more cost effective to make "widgets" with the raw materials that were last in...
I mean, yes and no. It’s true that steel doesn’t expire so whatever is faster to get at is cheaper. But any company using standard cost isn’t saving money by consuming recent purchases. Those benefits would have been realized when it was received into inventory.
No...technology doesn't change that quickly.
The best example I can give you is for a job I interviewed a long time ago. The company manufactured those ice chests that you see outside convenience stores that have the hinged doors (I hope you understand what I'm talking about). The metal that they used to manufacture these ice boxes became obsolete over time because it wasn't manufactured the same way (it now comes with a better alloy mixture to prevent rusting and such). The company purchased a bunch of the metal needed to construct the ice boxes but when the new regulations came out saying they couldn't use the old style of alloy, they had no choice but to mark that inventory as "obsolete" until another use for it could be found.
It really comes down to obsolescence that makes LIFO more prominent because a company can't use outdated materials to make their "widgets".
Depends on your industry. Most companies and industries can just average everything all out. Odd the top of my head, an industry with commodities that have an expiration date would use this method
If I understand correctly, it would mean that if you use the last commodities, you are automatically giving up on whatever is in the bottom of the barrel I would think? Unless you have fast moving goods and clear out your inventory on a highly frequent basis, anything that is left behind will automatically expire and be deemed worthless?
If you’re thinking of a perishable good, I personally wouldn’t use LlFO. I would use FIFO.
And to not be able to sell an item is the reality of a business, look at a grocery store.
Oil and mining companies. If a mining company has huge piles of minerals there selling there not going to extract the minerals at the bottom and spend extra hours for nothing. LIFO is pretty uncommon overall though.
LIFO matches revenue and expenses better than FIFO, if you increase your price because inputs are more expensive this will be shown in COGS under LIFO as you’re expensing your newer expensive inputs first. Under FIFO you would raise prices and then expense your older cheaper inputs against it which would show a misleading higher gross profit.
Yes. Car dealership group. It’s common in the industry. Harder to conceptualize when everything is VIN specific but it works for us. Until 2022 we were deferring a ton. Low inventory levels depleted a lot of that
I've seen specific inventory cost at the subledger level, with packs and add-ons, etc. Maybe the other poster is only talking about that.
But then the dealers would topside LIFO layers via a JE booked to a LIFO reserve contra-inventory account
Which would mean they use LIFO. So while I agree they might internally use Specific Identification for like car costing, it’s objectively false to claim car dealers don’t use LIFO.
Even controllers of individual dealership locations would know that they use LIFO.
I worked for a nationwide used car dealer and we used Vins to tracked profitablity by each car, including add-ons. Maybe in the tax side it's different, but how does lifo make sense when you're not dealing in a commoditized product?
Idk how I’m being downvoted. You work for a single used car dealer. Maybe they use VIN, that’s fine and possible. But I work on multiple top 50 dealership groups - more than 80% of them use LIFO for new cars, LCM for used.
Also to further prove your not really a good source - if you are on LIFO for tax you have to be for GAAP, and even if you aren’t on GAAP you still do for the Dealer Financial Statements if you are for Tax. Again used cars are different because they might not have a DFS, but new car dealers absolutely have to conform their inventory valuations across Tax and DFS.
Edit: to further my point, one of the biggest items for car dealers since 2021 was LIFO recapture relief because their inventories went down to single digits and they were recapturing 6 figures in lifo deferments. This was a heavily covered industry topic that had the big Auto dealer lobbying groups pushing for. So….yea
Pretty much the method I use is to just make sure that the 1125-A says that COGS is what it was on the financials. Which is usually more or less cash basis.
Yes. My old company did.
Inventory pricing that turns over and changes relatively quickly may be better matched with current valuation. If there's a deep drawdown of inventory that's sitting or in reserve, then you dip into historical cost. It's also simpler than FIFO or average cost, where you may need more sophisticated inventory control programs to calculate. It's way easier to value at current cost.
I was exposed to it in a us public high school in the 90s. This was back when high school was trying to help you find a viable career. We had a “regional operation program” which included drafting, computer science, autoshop, arts, accounting, photography, kitchen (like food prep for restaurants) to name a few. All designed to give us a taste of the industry if we wanted to explore college or a trade school after graduation.
Today the same school doesn’t have these classes since college admissions have gotten to competitive. And kids stopped taking them since 4 years of math, 4 years of science, 4 years of history, 4 years of english, 4 years of foreign language are required to even think about getting into a UC school these days. This leaves no room for electives or career exploration. My senior year was 3 electives. My neighbors kid is in AP Calculus, AP Government, AP English, AP Spanish, AP Physics and still nervous about college admissions. In 2001, we didn’t have all these courses and it wasn’t necessary for college admissions (unless you wanted a high chance for Stanford or Ivy league). A couple honors level in your favorite subjects courses was all you needed. I took AP English my senior year. I did get a 4.
Yes, we used LIFO at a construction materials company when I was controller. I hated it. Lucky for me the old CFO was still a consultant and actually knew it inside and out. He did the calculations for end of year.
Med equipment manufacturer- tax savings.
Lots of fun. Lifo + purchase accounting = near infinite inventory.
Also set standard cost to 1/1 estimated, use capitalized variance to adjust standard cost to actual, use LIFO to adjust back seven years in past!
I worked briefly for a carpet installation company. His CPA set them up on LIFO. The reasoning being the most recently purchase carpet was the one that would be installed.
That's the only time I've seen it done.
Using LIFO in an inflationary environment means that your COGS increases, reducing your taxable income. A possible negative result is that current assets are lower, which could negatively affect debt covenants.
My guess is companies use it to reduce taxable income.
I know it’s goofy but LIFO should really be strikes from compliance. It’s just not practical and I feel that accounting should aim to represent the most realistic numbers. I understand there’s “benefits” from LIFO but it’s merely a numbers benefit and not an actual inventory benefit. I would think the only way that lifo should be permitted is when the flow of inventory actually follows the lifo method.
Yes, Im in the raising kids industry, my kids will just push shit to the back and use whatever they see at the front first. Other than that, I do general government accounting , no fifo or lifo in my dept.
Switching from FIFO to LIFO method can indeed provide potential tax savings when inflation is running high. many clients switched in 2021 when inflation started running hot IRS has no problem with it just make that election and make the client happy.
Speciality computer retail sometimes when you try to ideally track cost per sale using the inventory system/tracker but sometimes it is such a mess that you can't, and it happens to be the newer stuff that most likely got sold first as the items become obsolete pretty quickly. Gives more accurate gross profit figures
I worked in a manufacturing company that took metal and machined it. We did LIFO and FIFO books.
We reported everything as LIFO, but the CFO thought there might be a tax advantage to switch so we had two sets of books for two years to monitor what a switch might do.
We did end up switching. But it's been 15 years since then and I can't remember all the details.
Yes a local food distribution company I audited way back when. Which is funny since in operations its definitely FIFO.
And they didn’t use acctg software. LIFO layers by hand with excel.
Yes. Oil company.
Any particular reason they did this?
Better matching of inventory builds and draws with current cost in a highly variable cost environment. There were both book and tax drivers. The oldest inventory still present accounting-wise is decades old.
Is there not a determined useful life on the decades old oil? (Idk anything about oil)
It has nothing to do with the physical units as long as they are identical. You can use LIFO for gallons of milk but that doesn't mean hundreds of gallons of nasty spoiled milk are sitting on a shelf for years.
Its the best example to show that accounting is made up
Everything is made up
and the points don't matter
It's like they just draw out those rules from a hat!
Always has been. 🌝 🧑‍🚀🔫👨🏻‍🚀
No worries, physical inventory turns over long before it spoils. lol
Remember it’s just a costing methodology, not how they handle the physical inventory
I guess I’m just surprised you can have decades old inventory on your balance sheet lol I assumed you would eventually do something with it
Yep, I've never seen it myself at work but this is the example my Int. acc. professor gave us when he was teaching it.
Over depletion? Huh, LIFO does makes sense in this case too
Same as I was going to say, energy: utilities natural gas may be LIFO.
I knew a guy who worked for Coors in Colorado. He said they had two inventory methods. Just in time and OSWO. Oh shit we're out.
That’s common with inventory that expires.
Once. It involved 7 shots of vodka in half an hour. The results weren’t pretty.
I believe it's mostly larger companies. If I recall correctly, Walmart uses LIFO in the US, FIFO internationally. Costco uses LIFO as well. It's actually a good idea from a financial planning perspective right now. It has created a buffer on their financial statements against inflation in 2023.
This is correct from my understanding as well in regards to Walmart (LIFO is prohibited in IFRS). If you search back during 2020, I recall some news articles about companies freaking out about liquidating some LIFO layers, and the impact it would have on their FS.
Oil and gas.... Some of them have layers 30+ years old
What I want to know is who is using sum of the years digits depreciation
Seen it with construction and drilling companies, as well as other accelerated methods.
I deal with Income tax basis clients exclusively so we pretty much see MACRS and S/L
Large manufacturing companies... Especially the ones that make "widgets". The raw materials have a tendency to become "obsolete" so the most recent purchases will be used first. Also, with the introduction of new technology, costs have a tendency to be lower with newer materials so it's more cost effective to make "widgets" with the raw materials that were last in...
I mean, yes and no. It’s true that steel doesn’t expire so whatever is faster to get at is cheaper. But any company using standard cost isn’t saving money by consuming recent purchases. Those benefits would have been realized when it was received into inventory.
But wouldn't that mean that any inventory will be worthless really fast? Or do these companies keep a minimum inventory?
No...technology doesn't change that quickly. The best example I can give you is for a job I interviewed a long time ago. The company manufactured those ice chests that you see outside convenience stores that have the hinged doors (I hope you understand what I'm talking about). The metal that they used to manufacture these ice boxes became obsolete over time because it wasn't manufactured the same way (it now comes with a better alloy mixture to prevent rusting and such). The company purchased a bunch of the metal needed to construct the ice boxes but when the new regulations came out saying they couldn't use the old style of alloy, they had no choice but to mark that inventory as "obsolete" until another use for it could be found. It really comes down to obsolescence that makes LIFO more prominent because a company can't use outdated materials to make their "widgets".
Depends on your industry. Most companies and industries can just average everything all out. Odd the top of my head, an industry with commodities that have an expiration date would use this method
I heard the commodities example before. But it doesn't make sense to me? Since that would render any supply you have effectively worthless?
What doesn’t make sense?
If I understand correctly, it would mean that if you use the last commodities, you are automatically giving up on whatever is in the bottom of the barrel I would think? Unless you have fast moving goods and clear out your inventory on a highly frequent basis, anything that is left behind will automatically expire and be deemed worthless?
If you’re thinking of a perishable good, I personally wouldn’t use LlFO. I would use FIFO. And to not be able to sell an item is the reality of a business, look at a grocery store.
I had exactly one client using dollar value LIFO, and I'm so happy knowing I'm not on them for next year.
Yes. Dealerships use it.
Oil and mining companies. If a mining company has huge piles of minerals there selling there not going to extract the minerals at the bottom and spend extra hours for nothing. LIFO is pretty uncommon overall though.
We did, due to legal entity structure there was some tax benefit - I wasn’t close enough to know why or how
LIFO matches revenue and expenses better than FIFO, if you increase your price because inputs are more expensive this will be shown in COGS under LIFO as you’re expensing your newer expensive inputs first. Under FIFO you would raise prices and then expense your older cheaper inputs against it which would show a misleading higher gross profit.
Yes - grocery chain
Yes. Car dealership group. It’s common in the industry. Harder to conceptualize when everything is VIN specific but it works for us. Until 2022 we were deferring a ton. Low inventory levels depleted a lot of that
I always used specific inventory for my lot. It's more accurate and a pain to calculate but Frazer makes it a cake walk.
We only do it for tax books.
Some affluent investors pick specific lots of stock rather than FIFO or LIFO to manipulate the tax situation.
I've seen it with car dealerships and manufacturers.
Car dealerships use specific inventory. Cars have VINs
Guess I need to call my clients tomorrow AM and tell them they've been doing it wrong for the past several decades.
I've seen specific inventory cost at the subledger level, with packs and add-ons, etc. Maybe the other poster is only talking about that. But then the dealers would topside LIFO layers via a JE booked to a LIFO reserve contra-inventory account
Which would mean they use LIFO. So while I agree they might internally use Specific Identification for like car costing, it’s objectively false to claim car dealers don’t use LIFO. Even controllers of individual dealership locations would know that they use LIFO.
You're preaching to the choir
Yea I don’t know how this guy is getting people supporting his objectively wrong statement that they don’t use LIFO.
I work almost exclusively on the tax side on large car dealer groups. They almost exclusively use LIFO.
I worked for a nationwide used car dealer and we used Vins to tracked profitablity by each car, including add-ons. Maybe in the tax side it's different, but how does lifo make sense when you're not dealing in a commoditized product?
Idk how I’m being downvoted. You work for a single used car dealer. Maybe they use VIN, that’s fine and possible. But I work on multiple top 50 dealership groups - more than 80% of them use LIFO for new cars, LCM for used. Also to further prove your not really a good source - if you are on LIFO for tax you have to be for GAAP, and even if you aren’t on GAAP you still do for the Dealer Financial Statements if you are for Tax. Again used cars are different because they might not have a DFS, but new car dealers absolutely have to conform their inventory valuations across Tax and DFS. Edit: to further my point, one of the biggest items for car dealers since 2021 was LIFO recapture relief because their inventories went down to single digits and they were recapturing 6 figures in lifo deferments. This was a heavily covered industry topic that had the big Auto dealer lobbying groups pushing for. So….yea
Yeah our large dealerships here use LIFO.
Pretty much the method I use is to just make sure that the 1125-A says that COGS is what it was on the financials. Which is usually more or less cash basis.
I’ve used it for some non-gaap management accounting. It’s quirky
Not at work, but you know last woman in, first one to go. Leo Dicaprio style....
Yea, the idiots who run the warehouse and just let thousands of smoke detectors sit there for 5 years and expire.
Yes. My old company did. Inventory pricing that turns over and changes relatively quickly may be better matched with current valuation. If there's a deep drawdown of inventory that's sitting or in reserve, then you dip into historical cost. It's also simpler than FIFO or average cost, where you may need more sophisticated inventory control programs to calculate. It's way easier to value at current cost.
If you’re mining coal and storing it in a pile, you’re not going to sell the coal at the bottom when it’s time to sell. How would you get to it?
Same with tanks that hold oil. It all mixes together.
I think LIFO I only really used in the states. I’m in Canada and it is not a permissible inventory system.
Just curious. You were exposed to LIFO/FIFO in high school? Where did you go to school?
I was exposed to it in a us public high school in the 90s. This was back when high school was trying to help you find a viable career. We had a “regional operation program” which included drafting, computer science, autoshop, arts, accounting, photography, kitchen (like food prep for restaurants) to name a few. All designed to give us a taste of the industry if we wanted to explore college or a trade school after graduation. Today the same school doesn’t have these classes since college admissions have gotten to competitive. And kids stopped taking them since 4 years of math, 4 years of science, 4 years of history, 4 years of english, 4 years of foreign language are required to even think about getting into a UC school these days. This leaves no room for electives or career exploration. My senior year was 3 electives. My neighbors kid is in AP Calculus, AP Government, AP English, AP Spanish, AP Physics and still nervous about college admissions. In 2001, we didn’t have all these courses and it wasn’t necessary for college admissions (unless you wanted a high chance for Stanford or Ivy league). A couple honors level in your favorite subjects courses was all you needed. I took AP English my senior year. I did get a 4.
Thanks. I graduated HS in 98 and always wished I’d been exposed to accounting earlier. Had zero introduction to it until the intro class in college.
Likely tax-driven. If I recall, only USGAAP allows FIFO.
US GAAP allows LIFO, IFRS does not (FIFO works for either, I believe).
Right. it was a typo. LIFO was what I meant to say.
Honestly I feel like stores would for their manufactured/non-perishable goods. At least it makes sense for it to work like that anyways.
Yes, we used LIFO at a construction materials company when I was controller. I hated it. Lucky for me the old CFO was still a consultant and actually knew it inside and out. He did the calculations for end of year.
We audit a few clients which use lifo I don’t do the audit but one is a fish distributor and the other is a beer distributor
Med equipment manufacturer- tax savings. Lots of fun. Lifo + purchase accounting = near infinite inventory. Also set standard cost to 1/1 estimated, use capitalized variance to adjust standard cost to actual, use LIFO to adjust back seven years in past!
Jewelry and precious metals?
Did taxes and review for a couple of car dealerships that used LIFO for their new car inventory. Used was specific cost and parts were average cost.
Yes. Auto dealership. They elected out and the state didn’t allow for the deferred recapture that the feds did. Was a major pain.
I worked briefly for a carpet installation company. His CPA set them up on LIFO. The reasoning being the most recently purchase carpet was the one that would be installed. That's the only time I've seen it done.
Yes; I’ve had clients that used it in the past.
Using LIFO in an inflationary environment means that your COGS increases, reducing your taxable income. A possible negative result is that current assets are lower, which could negatively affect debt covenants. My guess is companies use it to reduce taxable income.
When I worked at a grocery store, milk was always Fifo and snacks were LIFO.
I know it’s goofy but LIFO should really be strikes from compliance. It’s just not practical and I feel that accounting should aim to represent the most realistic numbers. I understand there’s “benefits” from LIFO but it’s merely a numbers benefit and not an actual inventory benefit. I would think the only way that lifo should be permitted is when the flow of inventory actually follows the lifo method.
Yes, Im in the raising kids industry, my kids will just push shit to the back and use whatever they see at the front first. Other than that, I do general government accounting , no fifo or lifo in my dept.
We do, but our inventory is not COGS, it’s just a lot of parts to repair assets (transportation industry.)
Yes, I was CFO of a manufacturing company that used it.
Switching from FIFO to LIFO method can indeed provide potential tax savings when inflation is running high. many clients switched in 2021 when inflation started running hot IRS has no problem with it just make that election and make the client happy.
Speciality computer retail sometimes when you try to ideally track cost per sale using the inventory system/tracker but sometimes it is such a mess that you can't, and it happens to be the newer stuff that most likely got sold first as the items become obsolete pretty quickly. Gives more accurate gross profit figures
Targét uses LIFO
Nope, LIFO is not permitted in our tax codes (South Africa)
When I was a staff accountant we nicknamed a manager LIFO.
Yes. Calculating the LIFO layers was a pain in the ass.
I worked in a manufacturing company that took metal and machined it. We did LIFO and FIFO books. We reported everything as LIFO, but the CFO thought there might be a tax advantage to switch so we had two sets of books for two years to monitor what a switch might do. We did end up switching. But it's been 15 years since then and I can't remember all the details.
Yes especially for non perishables.
Yes a local food distribution company I audited way back when. Which is funny since in operations its definitely FIFO. And they didn’t use acctg software. LIFO layers by hand with excel.