LIFO method

It may create distortions on a company’s profitability and financial statements.

Sir can u explain how

LIFO is not allowed because it's create reduction in tax burden under inflationary economies. This can happen because LIFO assumes that inventory last comes will be consumed first in the production process. As a result higher value inventory will be included in cost of sales figure which will show in larger cost and ultimately lesser profits and lesser tax and cost of old inventory remain in closing stock, which is not true/real.

And other major reason is that we requires the figure in statement of financial must be according to present market conditions. LIFO inventory is expensed out first last come items as cost of sales and old inventory is remain as it is in closing stock. Thus, the figure that will be reported in the statement of financial will be according to the inventory in store that might be not relevant for the users of financial statements and that gives out dated information in the financial statement. The impact of its effect not only for one period, but also for the next year accounting records. Therefore, the implications of its in accounting are also vital.

So, LIFO is often presents a balance sheet number that is completely out-of-date and useless. When applying LIFO, the latest costs get moved to cost of goods sold so the earlier costs remain in the inventory account—possibly for years and even decades.

Possible Manipulation : A company using last-in, first-out (LIFO) method can easily manipulate its reported earnings for a period by changing its purchase pattern at the end of the year.

So, because of this it's not allowed, and also not suitable for business purposes..

Thank u very much @ sagar sir its crystal clear now

Most welcome.........

Nice explaintion sagar

Thank you............Ayusmita ji

Simple, clear and logical explanation..
Sagar sir, your answers are very helpful to us.

Thank you..... Nidhi ji, for this words of appreciation...
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