LIFO inventory method applies that the last inventory to a business should be sold first while FIFO takes the initiative to sell old inventory units first. In considering tax purposes, LIFO deducts the most recent costs of purchases hence leading to lower tax margins due to price inflation. FIFO deducts the oldest inventory purchases hence leading to lower cost of goods sold (Tanaka & Respati, 2021). When the low cost of goods is deducted, the amount of profit realized is high which leads to the payment of high taxes. Since LIFO deducts the latest (high) costs of purchases, the taxes due are reduced. Despite LIFO leading to low taxes, Virginia Industries aims to become profitable in its first year and for the foreseeable future.
A company can be profitable when the quality of products and goods sold to customers are of good quality. Using the LIFO inventory method can lead to the first inventory purchases that are not given preference when selling stock deteriorating in quality due to holding for long (Tanaka & Respati, 2021). FIFO promises quality enhancement due to selling the first inventory purchases which can create a way for management of good quality (Tanaka & Respati, 2021). For example, poor quality may lead to experiencing sales returns due to a bad state hence causing losses to the company. Even though LIFO has a major benefit in lowering tax liability, the tax is calculated as a percentage of the calculated profit after the deduction of all operating expenses.
Reference
Tanaka, G. M. P., & Respati, H. (2021). Cost of inventory calculation analysis using the FIFO and LIFO methods. Journal of Business Management and Economic Research, 5(4), 109-120.