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Administration Looks to Eliminate LIFO, a Favorable Method of Inventory Accounting

So-called "last-in, first-out" method of inventory accounting, or LIFO, allows companies to calculate the cost of goods sold based on the price of the most recently purchased ("last-in") inventory, rather than inventory that was purchased more cheaply in the past and has been sitting on the shelf. That boosts the cost of goods sold, which lowers profits - and, thus, taxable income. LIFO is particularly important to companies that have slow-moving inventory - such as industrial manufacturers and distributors - and are therefore vulnerable to rising prices.

"We normally replace every piece of inventory we sell with a higher-priced piece of inventory," says an executive at an industrial manufacturer. "Under LIFO, all of the inflation that is built into our product is not recognized for tax or book purposes."

Management at such companies breathed a sigh of relief last year when Congress quietly dropped plans to eliminate LIFO. But it didn't take long before the funny-sounding acronym was back in the taxman's sights. The 2011 federal budget proposed by the Obama Administration again includes a provision to repeal LIFO accounting. The government estimates that the move would boost federal coffers by $59bn over 10 years.

Even if LIFO somehow survives another year of federal budgeting, it still faces the long-term threat of being wiped out if the United States adopts international financial reporting standards, which do not allow LIFO.

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