Why The Usa Is A Method Of Inventory Valuation

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Introduction In business trade there are many evaluation methods to value the inventory. The last in, first out (LIFO) method is one of the proper methods in inventory valuation method. For some reasons in IAS 2 Inventories it is not able to be used any more, but it is still accepted by the Financial Accounting Standards Board (FASB) in the United States of America. LIFO refers that the last importing item of inventory is sold by the first purchased inventory. To use this method will lead to some potential financial questions, especially in the period of inflation. However, using this method can also avoid some questions in the period of inflation. This essay will analyse the main reasons why the USA will continue to accept this method…show more content…
So it will increase the cost of goods sold. However, the inventory is valued by the earlier lower price, so this will reduce the profit on sales (ibid). As a result, a company can use this method to reduce the level of its profitability. 2. Taxes problem Because some companies use LIFO, they can defer recognizing the income taxes (Pincus, 1989). Most of the times this is the only one reason permitted by government, after all this method is not a wrong method (ibid.). USA Internal Revenue Service (IRS) states that if companies want to use LIFO valuation methods, then the financial report must also use the LIFO (Kieso, Weygandt and Warfield, 2001). But some companies try to use this method to reduce their gross profit to avoid handing in too much tax (Mulford and Comiskey, 2008). At least they can alter their gross profit about 15%-20% by LIFO (ibid.). So using this method can let government has too much cost of tax. There is one fact, in 2008 when the chairman Cox of International Accounting Standards Board (IASB) determined that let the companies in the USA to use the International Financial Reporting Standards (IFRS) in their financial reports (Johnson and Dhaliwal, 1988). For fitting the situation of USA, one change in this standard is banning the LIFO (ibid.). At the same time, the financial is very serious non-transparent in United States (ibid.). For the purposes of federal tax, they
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