If you are a wholesaler, distributor or a company that has substantial inventory, you can improve cash flow by reducing the cost of your Closing inventory value.
Taken from our friends at GLO CPA’s Newsletter for August 2008
For more than 70 years, and especially in times of inflation, the LIFO inventory method has proven to be an extremely effective tax management tool to reduce taxable income and taxes. Under the LIFO inventory method, the last inventory purchased is treated as the first inventory sold. This differs with other inventory methods such as first in, first out (FIFO) where the earliest inventory purchased is treated as the first inventory sold. The benefit is in periods of rising costs the LIFO method decreases the value of ending inventory compared to the FIFO method. Lower ending inventory results in higher cost of goods sold which in turn lowers taxable income and the tax liability businesses must pay. This allows companies to use the tax savings to reinvest in their businesses. In summary, the LIFO inventory method, similar to other accounting expenses such as amortization and depreciation, increases a company’s cash flow by reducing income and tax liability.