Many auto dealerships in the U.S. choose to use the LIFO inventory valuation method because they have found the benefits to be significant.
The benefits of using the LIFO method for auto dealerships include:
- matching inventory costs to revenue,
- reduction of income tax liability (deferment), and
- minimizing write-downs of vehicles to fair market value because of decline in inventory costs.
The major reason LIFO calculations are so popular in the automotive industry is due to consistently increasing costs of vehicles which is at the heart of why the LIFO method may provide the dealership with significant income tax benefits and impact cash flows in terms of taxes paid.