Question

Analysts claim that it is more difficult to forecast net income for a company that uses LIFO. Why might this be true?

Answer 1

There are different inventory valuation methods and LIFO is one of them. In this inventory method, inventory which has been purchased in the end is sold out first this is why it is termed as last in first out.

This inventory method is complex if there are more fluctuations in the prices. It is difficult to maintain inventory using this method because the most recent inventories are used as COGS and there is a possibility that the outdated and older inventory cannot be sold so this method is considered unrealistic. More critical work is performed in this method by the entities. If the expansion of business is needed then the LIFO method is not considered good for the business.

Therefore, the above mentioned statement is true as the LIFO inventory method is difficult.