Product Extended LIFO Valuation Setup overview

Product > Setup > Extended Last-In-First-Out Valuation

Function acronym: ICSEV

Use this page to create last-in-first-out categories for inventory valuation.

LIFO, or last in, first out, is an inventory valuation method. It values inventory items in the order in which they are acquired. It is sometimes used to lower your gross profit and increase your cash flow by reducing your tax liability. LIFO is an amount-based valuation, double extension, as opposed to FIFO, first in, first out, which is an inventory-based valuation. The LIFO method measures inventory changes from the beginning to the end of the year in terms of equivalent amounts. Therefore, the net amount-based valuation allows many products to be included in a particular LIFO category. LIFO is recommended for these situations:
  • During times of inflation

    LIFO is useful during times of inflation. You can deduct the most recent, higher cost of your products as the cost of sale, thereby reducing your taxable income. The use of LIFO undervalues inventory and overstates Cost of Goods Sold, causing net income to be understated, which results in a tax advantage. If you ever change from LIFO or liquidate your company, your taxes can increase significantly. This is to compensate for the savings you obtained under the LIFO method.

  • When prices are low, but due to increase

    The best time to choose the LIFO method is when prices are low but are on the verge of rising. The greatest benefit is visible if your current inventory valuation is at a low point. The valuation of your base year is frozen. This is the first year of LIFO. Taxes are not paid on that inventory if you remain with the LIFO method and are never forced to dip into that inventory. If your prices and year end quantities increase from year to year, your tax savings continues to grow. Your tax savings may be the greatest when inflation is high. Savings can continue even if your product cost increases in the future are only marginal.

You do not have to convert all your products to LIFO. Selectively choose to convert those products that provide the greatest tax savings. Combine various products in your inventory into the same LIFO category. Understand the concepts of LIFO so that your year-end inventory provides the greatest benefit. If your year-end inventory falls, you may end up paying back some of those benefits you received in earlier years. When LIFO is used, you should fully disclose the effects of LIFO on the financial statements. This avoids the misinterpretation of the data. Lenders and investors do not look favorably on lower assets or inventory value and lower income.

Double extension method

The double extension method of calculating LIFO is used by Distribution SX.e. Double extension requires a base year cost to be established for each product. Generally, the base year is the year the company entered into the LIFO program. During each year end, the current value of the inventory extension is compared against the base year extension. The resulting value is compared against the value from the previous year. This provides a new inventory index representing inventory growth and value from which taxes are calculated.

The current cost for all products in each LIFO category is averaged in the Product LIFO Valuation Master List Report. The cost is determined from the Post To G/L By option in SA Administrator Options-Products.

Note: There is much to consider when you convert to the LIFO amount-based valuation method. Consult with your accountant or in-house accounting department before making any decisions.