Concerns about rising inflation and slowing growth are putting the spotlight on an accounting method U.S. companies use to lower their federal tax bill by inflating their costs, which also squeezes their quarterly earnings.

Inflation shines light on companies' use of LIFO Concerns about rising inflation and slowing growth are putting the spotlight on an accounting method U.S. companies use to lower their federal tax bill by inflating their costs, which also squeezes their quarterly earnings. Companies including grocery chain Kroger in recent weeks have said their use of last-in, first-out accounting, or LIFO, has increased costs and dented earnings. With LIFO—which is permitted under the U.S. Generally Accepted Accounting Principles, but not under International Financial Reporting Standards—companies recognize their most recently acquired inventory through their cost of goods sold. With inflation around a four-decade high, such inventory is more expensive than goods purchased earlier, and acts as a drag on earnings. Companies use LIFO to lower their taxable income. But to do so, they also must use it for financial accounting, even though it can ding financial results. By contrast, under first-in, first-out accounting—another popular accounting method—companies record the cost of their oldest inventory first. In 2021, approximately 15% of companies in the S&P 500 used LIFO as their primary inventory method and 50% used FIFO, according to Credit Suisse, citing annual reports. The remainder used an average-cost method, a combination of methods, or methods that couldn’t be determined, Credit Suisse said. Wall Street Journal