The first-in, first-out (FIFO) inventory cost method assumes the oldest inventory is sold first. This leads to minimizing taxes if the prices of inventory items are falling. In this situation, the prices of the items purchased first are higher because the prices are downward trending and hence the cost of the previously purchased items of inventory (i.e. the first inventory in) is higher. This results in a higher company's 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGSꦕ). Last-in, first-out (LIFO) aไssumes the most recent inventory purchases are sold first.

Using the higher inventory costs (first in) would lead to a lower reported 澳洲幸运5官方开奖结果体彩网:net income or profit for the 澳洲幸运5官方开奖结果体彩网:accounting period (ve📖rsus last out). As a result, the lower net income would mean the company would report a🦩 lower amount of profit used to calculate the amount of taxes owed.

Understanding First-in, First-out (FIFO)

When companies generate their 澳洲幸运5官方开奖结果体彩网:financial statements, they must calculate the revenue generated from sales, the costs that went into production (or COGS), and also the profit earned for that time period. A company would take the revenue total and subtract the 澳洲幸运5官方开奖结果体彩网:inventory costs (as well as other expenses), 🌳to determinღe how much profit was earned.

Companies must determine which items in inventory were used up in generating the sales for that accounting period as well as the costs of those inventory items. If a company uses the FIFO inventory method, the first items that were purchased and placed in inventory are the ones that were first sold. As a result, the inventory items that were purchased first are recorded within the cost of goods sold, which is reported as an expense on the company's 澳洲幸运5官方开奖结果体彩网:income statement.

In other words, with the FIFO method, the oldest inventory will be used in determining the cost of goods sold. When sales are recorded for the accounting period, the costs of the oldest inventory items are subtracted from revenue to calculateဣ the profit from those sales.

First-in, First-out (FIFO) and Taxes

Although companies want to generate higher profits with each passing year, they also want to reduce their 澳洲幸运5官方开奖结果体彩网:taxable income. If a company's inventory costs rosꦓe by 50%, for example, the company would report a lower amount for net income, assuming sales prices weren't increased to counter the higher inventory expense. A lower net income total would mean less taxable income and ultimately, a lower tax expense fo🌌r the year.

If the older inventory items were purchased when prices were higher, using the FIFO method would benefit the company since the higher expense total for the cost of goods sold would reduce net income and taxable income. The newer, less expensive inventory 🍬would be used later, meaning the company would report a higher profit in later accounting periods and a higher taxable incꦺome—all else being equal.

Special Considerations

However, prices tend to r🦄ise over the long term, meaning that FIFO may not minimize taxes for a company. In a rising-price environment over the long term, the older inventory items would be the cheapest, while the newer, recently purchased inventory items would be more expensive.

FIFO would only minimize taxes in periods of declining prices since the older inventory items would be more expensive than the most recently purchased items. It's best to consult a tax professional before determining the best methods for reducing taxable income since there are many components that go into calculating a company's tax liability.