Inventory accounting directly impacts a company’s income statement and balance sheet. There are also tax implications for the choice of inventory accounting method, which impacts after-tax cash flows.
Income statement represents a company’s financial performance over a period of time. A company’s LIFO gross margin could be materially different that its FIFO gross margin, if the cost of the first goods purchased for inventory is materially different from the cost of the most recent goods purchased for inventory.
Balance Sheet represents a company’s financial position at a point in time. Management’s choice of inventory accounting method directly impacts the value of short-term assets and any financial metrics that include short term assets in their calculation. Choice of LIFO or FIFO can overstate or understate the real economic value of short-term assets on the balance sheet.