Management Accounting

Tiffany’s Holiday Gift: LIFO Cost Hikes

With gold and platinum prices soaring, big jewelry sellers that use the last-in, first-out method of inventory accounting are likely to book higher...
David KatzNovember 19, 2007

Although big jewelry retailers aren’t yet feeling the pain of soaring precious-metal prices, they will reportedly soon experience earnings hits via the last-in, first-out method of accounting for the cost of goods they’ve sold.

To be sure, large jewelers like Tiffany & Co. and big retail outlets like Wal-Mart that sell jewelry are protected in the near term from recent soaring prices in gold and platinum because they order their inventories up to a year in advance, according to the Associated Press.

But they’re still likely to be hurt by materials price hikes through their LIFO accounting, the wire service reported, citing analyst predictions that Tiffany is facing higher inventory charges as a result of the accounting method. For the six months ended July 31, Tiffany absorbed LIFO costs of $12.4 million, rising from $9.5 million in the prior year, according to the AP.

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Tiffany and other companies who use the method, of course, stand to gain on the tax side much of what they lose on the accounting side. The use of LIFO spawns higher costs and lower reported profits than the use of the first-in, first-out method, or FIFO. With prices going up as they are in the jewelry business, a company using FIFO would report higher profits and pay more in taxes than it would if it used LIFO.

Companies that use LIFO, however, are in some jeopardy of losing that choice. On the one hand, the inventory-accounting method has been under fire in Congress. Rep. Charles Rangel, the House Ways and Means Committee chairman, has proposed an outright repeal of LIFO. At the same time, the currently accelerating push toward a single set of international accounting standard along the lines of International Financial Reporting Standards, could also leave the method in the dust. While U.S. generally accepted accounting standards allow LIFO, IFRS bans it.