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All right. The last video we talked about

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the uh

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book uh advantages I guess you'd say is

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what I call them, now we're gonna talk

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about tax

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effects because naturally you're dealing

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with changing cogs which changes your

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gross profit which they're in changes

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your net income

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and when you change net income with

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these they're going to have a tax effect,

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so what are the tax effects among the

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different uh methods?

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So let's talk about that. So since

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inventory costs

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affect net income we just talked about

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that they inherently have potential tax

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effects

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they will change your taxes in some ways

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so why would one company choose another

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or one method over another one

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using tax effects. Assuming that

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we're in an inflationary period that's

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what we typically assume when we're

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doing these things is an inflationary

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period

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uh because FIFO yields the highest net

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income

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it's going to result in the company

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paying the highest amount of taxes

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again go back to the book advantage we

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said that our

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assets are going to look good because

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they're going to be at a higher asset

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but they're going to be more

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true as well, so really what we're saying

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is if you choose to do

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fifo what you're saying is I want my

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assets to look good

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for my investors but in order to get

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that I'm probably gonna have to pay more

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taxes.

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Okay. On the other side of that lifo

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because life will yield the lowest

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income it will result in the company

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paying the lowest taxes

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well LIFO remember if it's an

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inflationary period what I have on my

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balance sheet with assets is going to be

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fairly low

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so if I'm okay having lower inventory

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assets then that means that I don't

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necessarily have to pay as much in taxes

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so it's a give or take here

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um ultimately companies don't need to

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choose this based on how much they

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they're paying taxes they should do it

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based on what's more

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accurate in the accounting and the

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accounting records but these are one

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these are two things that

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companies do look at. Even more

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importantly is this next part

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and that is companies can choose to use

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different methods for financial

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reporting purposes and tax reporting

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purposes,

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so now that throws a whole big monkey

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wrench in this.

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A company can choose to use one method

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for the purpose of

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financial reporting and another method

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for the purpose of tax reporting,

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so ideally what you what you would

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normally do is you would say I want to

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do FIFO for financial reporting purposes

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because that's going to

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make my assets be the highest maybe look

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really good give me the highest net

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income

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but I'm going to do LIFO for tax

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reporting purposes because that means

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that I don't have to pay as much taxes

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that's the ideal scenario that you can't

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do

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they won't allow you to do that. However

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the irs requires companies that choose

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to use lifo for tax reporting purposes

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to also use lifo for financial reporting

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purposes you can't have your cake and

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eat it too

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it's pretty much what that gets down to,

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you cannot get out of paying less

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taxes and still look really good the

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moment you say that you're going to use

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LIFO for tax reporting

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you have to use LIFO for uh finance

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reporting purposes.

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You can pretty much use any other

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combination you want as long as you're

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not using LIFO

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for tax reporting purposes this is

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called the lifo conformity rule,

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so that's what you have to look at when

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you're dealing with tax effects and

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choosing one method over the other.

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Appreciate it.