LIFO experts since 1983.

LIFO Can Mean Cash for Your Company

LIFO, or Last In--First Out accounting,is a great source of additional cash for businesses that carry inventory. LIFO subtracts inflation from inventory costs, deducts it from taxable income and records it in a LIFO reserve account on the books. The LIFO benefit grows as inflation widens the gap between current year and past year inventory costs. This gap is called the LIFO reserve. The tax savings from the yearly deduction can be invested separately or re-invested in the business.

Example:

 
With LIFO
Without LIFO
Revenue
$35,000,000
$35,000,000
Cost of Goods Sold
$30,600,000
$30,000,000
Operating Expenses
$1,500,000
$1,500,000
Taxable Income
$2,900,000
$3,500,000
Income Taxes @ 35%
$1,015,000
$1,225,000
Cash Flow
$2,485,000
$2,275,000
Extra Cash
$210,000
$0
Increased Cash Flow
9.23%
0%

 

There are as many LIFO methods as there are companies on LIFO. We focus on two LIFO methods, an internal index method and the Inventory Price Index Computation (IPIC) method.

 

The internal method bases inflation on a company's actual change in inventory cost by item from year to year. Generally the IPIC method shows more inflation, but in some instances a company's internal method shows higher inflation. We always run a parallel comparison to determine which method results in the largest tax savings.