New Inventory Management

(Continued from page l0) company managers are more inclined to work to match current selling prices with current costs because the cost accounting practices are geared to provide those matches automatically. When sales contracts are negotiated or selling prices set, heavy reliance on the most current cost is an absolute necessity because that will be the benchmark used by the accountant to determine profitability. As a result, revenue and expenses match, providing a clearer picture of financial performance. requires that both the financial statements and tax returns of the company be on the LIFO basis. Therefore, publicly traded companies or others depending on financial performance and the significant influence earnings may have on stock prices, may want to carefully consider the disadvantages associated with reporting lower profits and thereby reducing stock prices. This same point needs consideration with lending officers or creditors who use financial performance data to evaluate a company's credit standings.

Matching current revenues with current costs on the income statement is also an advantage. Since every dollar of inventory is a dollar of profit, by valuing inventory at the higher price, the company actually adds to the bottom line. By using LIFO, a company is expensing the most recent costs of acquisition of inventory against the revenues generated by those acquisitions. Thus. the company is retaining in inventory the beginning year costs so that the LIFO election favors accurate reporting of income on the income statement.

Financial managers also need to consider that for income tax reporting the LIFO election will not allow any reductions on inventory valuation for obsolescence, market values or any other reduction of inventory value. The standard for LIFO for tax return reporting purposes is cost. Generally speaking. however. the company is allowed to have obsolescence. market value or other reserves for financial statement reporting purposes.

LIFO election does result in slighr ly higher administrative costs. However, this disadvantage is potentially offset by the tax savings this election could provide compared to the current inventory valuation methods.

The LIFO election is made bv fil- ing Form 970 along with the company's income tax return. Using the maximum number of extensions allowed by the IRS, the latest filing date for these forms is nine-and-a-half months after the close of the company's fiscal year. y'Ournew state of the art radio frequency kilns will dry your timbers in days instead of weeks. y'rn"only process that dries uniformly to the core, significantly reduces checking, cupping/ twisting and warping. y' nvailaU e S4S, Full Sawn, or with our patented PNRIffi^ o, W textures in lengths up to 40 ft.

There are numerous decisions to be made related to the filing of Form 970 that are best made with a qualified advisor who is familiar with both the company's inventory and the LIFO tax and accounting rules. To avoid violating the conformity requirement imposed by the IRS. it is important not to issue any 12-month year-end financial statements without at least an estimate of LIFO impact on those financial statements.

Therefore, the striking advantages to electing the LIFO valuation method far outweigh any potential disadvantages. And, with lumber prices elevated to current levels, consulting with your tax advisor regarding the LIFO election for the 2003 year-end could enable your company to realize a substantial tax savings.

- Mr. Horst is the managing partner and Mr. Swiggum a manager at CPA firm William Vaughan Co., Toledo, Oh.

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