Why Should Businesses Consider LIFO?
• Increase cash flow by taking advantage of inflation • IRS-approved accounting method • Annual adjustment that does not impact day-to-day business • Minimal investment that can yield a big return The following example illustrates how LIFO increases cash flow: • We have two companies in this example – the company on the left is using the LIFO method, and the company on the right is not using LIFO. • Both companies had $35 million in revenue in 2008. The company on the left, however, had $30.6 mil in COGS, while the company on the right had $30 million in COGS. • The additional $600,000 in COGS is the difference between the LIFO Value of inventory and the actual cost of inventory. This difference, known as the LIFO Reserve, is added to COGS each year. • The company on LIFO has $2.9M in taxable income because of the increased COS gained from the LIFO Reserve. The company on the right has $3.5M in taxable income. • At a 35% tax rate, the company on LIFO deferred $210,000 of tax payments i
