Simplified LIFO can ease compliance, boost tax savings.By choosing the inventory method that best meets their circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or , manufacturers and distributors can increase the potential to realize significant tax savings. FIFO- and LIFO-based methods are the two options companies can choose to calculate inventory. Simply speaking, FIFO (First In First Out) A storage method that retrieves the item stored for the longest time. Contrast with LIFO. See traffic engineering methods. FIFO - first-in first-out matches older expenses against current revenues, while LIFO (Last In-First Out) A queueing method in which the next item to be retrieved is the item most recently placed in the queue. Contrast with FIFO. LIFO - stack matches more recent expenses against that same revenue. In general, LIFO is the right choice if the price of inventory is going up. Because many companies experience some degree of inflation in inventory costs, LIFO is a common choice, but has a downside Downside The dollar amount by which the market or a stock has the potential to fall. Notes: You might hear someone say that the downside on stock XYZ is $10. What that means is that the stock could fall by this amount if things got bad. . The compliance effort is complicated; the calculations can be complex and time-consuming time-con·sum·ing adj. Taking up much time. time-consuming Adjective taking up a great deal of time Adj. 1. . Complicated compliance is not the only problem. Companies that do a good job of controlling their costs may find some of the benefit of LIFO disappearing. This benefit comes from offsetting current revenue with higher current costs, which reduces taxes. If a company is holding those costs down, taxes would trend up. Simplified LIFO Simplified LIFO relies on indices published by the U.S. Department of Labor Bureau of Labor Statistics Bureau of Labor Statistics (BLS) A research agency of the U.S. Department of Labor; it compiles statistics on hours of work, average hourly earnings, employment and unemployment, consumer prices and many other variables. . Instead of using complex calculations to generate an actual inventory inflation index, companies select published indices to establish the LIFO value of inventory. For companies holding down their inventory costs through favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. purchasing and labor costs, simplified LIFO may be especially beneficial. The costs of the published indices are sometimes higher than companies' actual inventory costs, allowing companies to offset more revenue than they could through regular LIFO. Relying on the published indices also greatly simplifies companies' future LIFO compliance efforts. Choosing Simplified LIFO Several conditions may indicate whether a company might benefit from a switch to simplified LIFO: * Regularly experiencing computational Having to do with calculations. Something that is "highly computational" requires a large number of calculations. errors in LIFO calculations; * Not realizing adequate tax benefits from the current LIFO method; * Considering abandoning the LIFO method for FIFO; * Experiencing decreases in inventory costs; and * Experiencing gross margin decreases between years. Simplified LIFO may be a better alternative than LIFO (or FIFO) for companies facing one or more of these issues. Further, simplified LIFO also simplifies the LIFO accounting process and allows a company to control its inventory costs better than its competitors. FROM BRIAN LUCAS, CHICAGO, IL |
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