Financial implications of a change to LIFO inventory valuation

Abstract

A number of South African companies have, in recent years, changed their method of inventory valuation to the last in, first out (LIFO) technique. The implications of such a change go far beyond merely reducing reported earnings and inventory levels. This article examines the effect of LIFO on some key financial variables of companies. It also considers the extent to which listed companies in South Africa have communicated with the market in order to ensure that the perceptions of such interested parties as shareholders, lenders and analysts are not distorted by the differing methods of accounting.