This refers to which month’s CPI or PPI indexes is used to calculate inflation under the IPIC method. In the case of a retailer using the retail method, the appropriate month is the last month of the retailer's taxable year. In the case of all other taxpayers including manufacturers, wholesalers, distributors and retailers using the cost method, the appropriate month is the month most consistent with the method used to determine the current-year cost of the dollar-value pool and the taxpayer's history of inventory production or purchases during the taxable year. A taxpayer not using the retail method may annually select an appropriate month for each dollar-value pool based on criteria outlined in the Regulations.
An inventory identification method for which inventories are identified at an average of unit cost calculated for each inventory item. The current-year cost of each item is based on the average of all the costs incurred by a taxpayer in acquiring or producing the same types of items during the taxable year. The average cost must be based on a full twelve months of costs and only costs incurred during the current taxable year.
The CPI are indexes tracked and published by the BLS and are utilized to measure inflation for some companies on the IPIC LIFO method. CPI measure the average change in prices of goods and services purchased by households, and measure such changes from the perspective of the purchaser. Retailers using the IPIC method are authorized to utilize the CPI. There are approximately 350 CPI codes, and indexes are released by the BLS each month.
A LIFO index that is the measure of LIFO inflation from the base year to the current year-end.
A LIFO index that is the measure of LIFO inflation for the current year only. Current year LIFO indexes are used for link-chain method LIFO calculations.
A term used to describe the year-end inventory balance.
FIFO is an inventory identification method for which inventories that assumes that the first items purchased are treated as the first items sold. Year end inventories are identified using the unit cost of the last purchases made on an item-by-item basis.
Often referred to as a “traditional LIFO method”, it describes a method for which inflation is measured based on a taxpayer’s actual change in unit price for each item.
The IPIC method is an elective method of determining the LIFO value of a taxpayer’s inventory. Unlike traditional LIFO methodologies, inflation under the IPIC method is based on externally published indexes, consumer or producer price indexes (CPI or PPI). The CPI and PPI are published by the United States Bureau of Labor Statistics (BLS), a division of the Department of Labor.
Application for Change in Accounting Method. A Form 3115 for LIFO-related method changes includes:
- Change from LIFO to a non-LIFO method (also referred to as LIFO termination)
- Change from one LIFO method to another LIFO method
Application to Use LIFO Inventory Method. A Form 970 is required for:
- Initial LIFO elections
- Expanding the scope of a LIFO election
- Changing from a non-IPIC method to the IPIC method
LIFO is an elective inventory identification methodology, an alternative to methods such as FIFO and average cost. It is a cost flow assumption that assumes that goods most recently purchased are the first to be sold, and that goods remaining in inventory at year end are those acquired in chronological order since the company adopted LIFO. This seldom matches the actual physical flow of goods. The theoretical justification for LIFO is that it matches goods sold during the current period with the cost of goods most recently purchased.
During periods of rising prices, the effect of using LIFO is that the value of the most recently purchased, higher cost items are included in the Cost of Goods Sold, while the older, lower cost goods remain in inventory. This results in a lower inventory valuation, higher Cost of Goods Sold and lower taxable income.
Taxpayers electing LIFO for tax purposes must elect LIFO for book purposes per IRS Regulations. The LIFO method used for book purposes need not be the same as the LIFO method used for tax purposes. It is common for taxpayers to elect the IPIC LIFO method for tax purposes and an internal LIFO method for book purposes.
This is the difference between the current period’s LIFO Reserve and the previous period’s LIFO Reserve (LIFO Expense = current period’s LIFO Reserve – previous period’s LIFO Reserve).
This is a term used to describe a change in the LIFO reserve that results in income (prior year reserve exceeds current year reserve). LIFO income is often the result of current year deflation or a LIFO decrement, or a combination of both.
The measure of LIFO inflation for each LIFO pool for taxpayers using dollar-value LIFO.
For taxpayers using the dollar-value LIFO method, all inventory items included in the LIFO election scope must separated by groups of similar inventory items. These similar items are grouped together to establish LIFO pools. There are a number of different pooling methods for grouping similar items together to establish LIFO pools allowed by the IRS.
A term describing the difference between the cost of inventory recorded on the general ledger and the LIFO value of inventory (LIFO Reserve = FIFO – LIFO). The LIFO Reserve represents the cumulative value that a company’s taxable income or financial reporting pre-tax income has been reduced by using LIFO since the method was first adopted. The general ledger contra asset account(s) used to record this difference is also referred to as the LIFO reserve.
An inventory valuation method in which inventory is valued at the lower of actual cost or current market price. LCM typically involves the use of market write-downs. The IRS does not allow taxpayers to write-down inventory that is on LIFO for tax purposes.
A term describing a situation in which the LIFO value of inventory is greater than the cost of inventory recorded on the general ledger.
The PPI are indexes tracked and published by the BLS and are utilized to measure inflation for some companies on the IPIC LIFO method. PPI measure the average change in the prices received by domestic producers of goods and services, and measure such changes from the perspective of the seller. Any company on the IPIC method is authorized to utilize the PPI. There are approximately 2,600 PPI codes, and indexes are released by the BLS each month.
The use of indexes published by the federal government to calculate LIFO indexes. The LIFO methods that permit the use of published indexes are the IPIC method available to all taxpayers and the BLS Department Stores Index method available only to department or discount store retailers.
This refers to which month’s CPI or PPI indexes is used to calculate inflation under the IPIC method. When a taxpayer elects a representative month, the same month must be used from year to year. To change or revoke its election of its representative month, the taxpayer must obtain the Commissioner's consent.
An inventory identification method for which inventories are identified at a moving average of unit cost calculated for each inventory item. Under this method, the average unit cost is recalculated with each inventory purchase for each item.