LIFO/FIFO

The decision to use Lifo, Fifo or weighted average is an income tax decision - that's all those costing methods exist for. They have no basis in reality outside of the tax consequences. No one stocks their shelves in LIFO (place the last items received at the front of the shelf so it's sold next) or FIFO (place the last items received at the back of the shelf so it's sold last) order to conform to a tax method. You might do it with items that have a shelf life, but there's no relation to this. She needs to make the decision with her tax accountant based on her situation. There are tax benefits in periods of rising or falling wholesale prices in choosing one method over another. In a period of rising prices, LIFO will will send your last (higher) cost to the income statement, which artificially lowers your income and therefore your taxes. Your inventory on the balance sheet remains valued at older (lower) cost. If she switches methods, she might lose her lower cost inventory reservoir on the balance sheet and send it to the income statement - effectively raising her taxes. This is why she needs to make the decision with a tax accountant.

Effectively, choosing the Last Cost method in RMS is LIFO. You change the cost of everything in stock to the cost of the last time it was received. Then, when you sell an item, this is the cost used, so your Last cost In is the First cost Out. When you use this method, though, you've revalued the

20 items that were in stock when you received 50 new items to the higher cost, artificially increasing their value. The problem comes when you take a year end physical and print the year end inventory value from RMS. I don't think you can use that value to replace the Balance Sheet value that was created in your accounting program, because that would effectively put back some of the LIFO costs that went to the income statement with RMS cost of sales. It seems to me that you have to stick to the Balance Sheet value created by paying the vendor invoices in order to maintain the LIFO layer there. You or she would have to discuss this with her tax accountant to decide what to do.

Rick Brown DataBasics

Rick, this is an excellent explanation of the costing system in RMS.