LIFO

LIFO is popular in the United States because of the LIFO conformity rule but serious theoretical problems do exist. Because of these concerns, LIFO is prohibited in many places in the world because of the rules established by IFRS. The most recent costs are reclassified to cost of goods sold so earlier costs remain in the inventory account. Consequently, this asset account can continue to show inventory costs from years or even decades earlier—a number that would seem to be of little use to any decision maker. In addition, if these earlier costs are ever transferred to cost of goods sold because of shrinkage in inventory, a LIFO liquidation is said to occur. Revenues are from the current year but cost of goods sold may reflect very old cost numbers. Information about LIFO liquidations appears in the footnotes to the financial statements so readers can weigh the impact.