What drives the cost flow assumption choice taxes

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What drives the cost flow assumption choice?
What types of firms would use LIFO?
Recent Price Change History 16
17 Presentation of inventory in the financial statements – the LIFO Reserve In footnotes to the financial statements, LIFO firms must disclose the balance of inventory as if FIFO The amounts that reconciles the difference between the inventory balances is the LIFO reserve (sometimes referred to as Inventory Valuation Allowance) The LIFO reserve is a contra asset account to Inventory Firms often refer to “replacement cost” or “current cost” instead of “FIFO cost” Using this disclosure, users can calculate income for LIFO firm as if FIFO had been used Important calculation to do before ratio analysis
LIFO disclosure example – Ford Motor Company »»Total inventory is a blend of FIFO and LIFO costs for different types of All inventories are stated at the lower of cost or market. Cost for a substantial portion of U.S. inventories is determined on a last-in, first-out ("LIFO") basis. LIFO was used for approximately 28% and 20% of total inventories at December 31, 2014 and 2013 , respectively. Cost of other inventories is determined by costing methods that approximate a first-in, first-out (" FIFO ") basis. Inventories at December 31 were as follows (in millions): 2014 2013 Raw materials, work-in-process and supplies $ 3,82 2 $ 3,628 Finished products 5,02 2 5,081 Total inventories under FIFO 8,84 4 8,709 Less: LIFO adjustment (978) (1,001)‹‹ LIFO reserve Total inventories $ 7,86 6 $ 7,708 18
LIFO disclosure example – Caterpillar, Inc. Inventories Inventories (principally using the LIFO method) are comprised of the following: December 31, (Millions of dollars) 2014 201 3 2012 Raw materials $ 2,986 $ 2,966 $ 3,573 Work-in-process 2,455 2,589 2,920 Finished goods 6,504 6,785 8,767 Supplies 260 285 287 Total inventories $ 12,20 5 $ 12,625 $ 15,547 Inventories are stated at the lower of cost or market. Cost is principally determined using the last-in, first-out (LIFO) method. The value of inventories on the LIFO basis represented about 60 percent of total inventories at December 31, 2014, 2013 and 2012. If the FIFO (first-in, first-out) method had been in use, inventories would have been $2,430 million, $2,504 million and $2,750 million higher than reported at December 31, 2014, 2013 and 2012, respectively. »» Inventory numbers in above table are net of LIFO reserve (by category). Total LIFO reserve is disclosed in the narrative above. 19
20 LIFO Layers Under LIFO, the oldest costs remain in the inventory asset account. These form the ‘bottom layers’. Sales are assumed to be made from the higher layers. This may result in part of inventory being costed at very old values. This could cause two problems: - Inventory may be undervalued as compared to current costs. -

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