Warren Buffet talks about LIFO adjustments in this video and how for large companies like Walmart they haven’t really changed despite a rising CPI. What is he trying to say exactly ? What is LIFO adjustments ?
video: [https://youtu.be/6C92C8lD0ek?t=200](https://youtu.be/6C92C8lD0ek?t=200)
(at the 3:20 min mark)
In: 2
LIFO, meaning Last-In-First-Out, is a way of tracking a company’s inventory where the last (or most recent) items to be added to inventory are the first items to be sold to customers. This is in contrast to FIFO (First-In-First-Out), where the first (or oldest) items are sold first.
In a period of rising prices, the LIFO method of accounting will result in lower reported net income, because the newest items to be added to inventory cost more money, so the company makes less profit off of selling them. If the FIFO method is used, the older, cheaper items are sold first, so reported net profit is higher. The difference in income between these two methods is what’s called the LIFO reserve or LIFO adjustment.
(Having a lower reported profit is important to companies because it means they need to pay less taxes. Their actual income doesn’t change, and they still have the same products in stock to sell, so it’s just a way of looking at their account books to minimize tax burden)
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