LIFO – Tax and Cash Flow Note

A company’s pre-tax cash flows are not affected by the choice of LIFO versus FIFO.

In the US, a tax law known as the “LIFO conformity rule” mandates that if a US company uses LIFO for tax reporting, it must also use LIFO for public financial reporting (i.e. U.S. GAAP reporting).

When prices are rising, LIFO accounting creates lower taxable income, which in turn increases after tax cash flow.

The management of a company may prefer to show a high net income to investors, but LIFO will generate more cash in an inflationary environment.

This legal/regulatory policy keeps companies from “getting the best of both worlds” by using LIFO for taxes to increase real cash flows, but then using FIFO for public financial reporting to show investors a higher net income than the net income reported to tax authorities under the LIFO method.

Get smart about tech at work.

As a non-technical professional, learn how software works with simple explanations of tech concepts. Learn more...

Data Science for Finance Bundle: 43% OFF

Get our Data Science for Finance Bundle for just $29 $51.
Get it now for just $29

Checkout our eBooks and Templates

eBooks and templates related to finance, R programming, Python, and Excel.
Visit Store
Get our Data Science for Finance Bundle for just $29 $51. That's 43% OFF.
Get it for $51 $29