Effect on Financial Statement and Taxes

IncomeUncle Joe, Inc partial income statement and balance sheet statement are presented below:

 Uncle Joe Inc
 Comparative Financial Statement
 Partial Income Statements
 FIFO  LIFO  Weighted Avg
 Sales  $      1,200  $   1,200  $          1,200
 Cost of goods sold  $         590  $      550  $             570
 Gross Margin  $         610  $      650  $             630
 Partial Balance Sheet
 Assets  FIFO  LIFO  Weighted Avg
 Cash  $      1,200  $   1,200  $          1,200
 Inventory  $         360  $      400  $             380
 $      1,560  $   1,600  $          1,580

 

Note that the cost of goods sold on the income statement and the inventory on the balance sheet add up to $950 which is the amount Uncle Joe paid for his inventory. Regardless of what cost flow method you use, the total amount spent should equal the cost of goods sold + ending inventory. Remember all you are doing is simply allocating your costs between an expense (cost of goods sold) and asset (inventory).

The above example, assumes a deflationary environments where the price of inventory declined. In a inflationary environment, the impact of using LIFO versus FIFO is reversed.