In our inflationary environment, the method that a company uses to value inventory can have an impact on the amount of revenue versus tax due. Investors are looking closely to understand the underlying business model.

Companies value inventory costs with:
🔹LIFO (Last in First Out) the most recently acquired inventory
🔹FIFO (First in First Out) the cost of their oldest inventory first
🔹Weighted Average Cost

In a recent WSJ article, ““It is a big benefit” for a company’s taxes, even though it can put pressure on earnings, said Michelle Hanlon, an accounting professor at the Massachusetts Institute of Technology. LIFO allows companies to use additional cash upfront from their lower tax bills to invest in their businesses.”

If the US government is looking for a revenue source, removing LIFO as an inventory valuation method “could raise around $1 billion in annual tax revenue, according to Thornton Matheson, a senior fellow at the Urban-Brookings Tax Policy Center think tank. Taxing companies’ LIFO reserves could raise approximately $50 billion over four years, according to Ms. Matheson, citing a Congressional Budget Office estimate from 2020. That figure has likely doubled since then due to higher inflation and oil prices, she said to the WSJ.”

Industry associations are lobbying the US Congress to keep LIFO as a valuation option.

The risk choice is revenue being sacrificed for taxes. CFOs and their teams are making assumptions about the economic forecast. What do you think is the best method to value inventory for financial transparency?