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LIFO method

Taha (T) (405 Points)

02 October 2020

is there any logical reason why LIFO is unacceptable as per income tax act

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ayusmita (Tax consultant) (5885 Points)
Replied 02 October 2020

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

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Taha (T) (405 Points)
Replied 02 October 2020

Sir can u explain how

Sagar Patel (Tax and Business Consultant) (11611 Points)
Replied 02 October 2020

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So, LIFO is often presents a balance sheet number that is completely out-of-date and useless.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..

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