Highest In, First Out (HIFO)
Candlefocus EditorHIFO is advantageous for companies mainly for the purpose of Tax Planning, as it results in the highest cost of goods sold being realized, leading to reduced taxable income. By using HIFO, companies ensure that the profit arising from their operations is minimized due to their inventory costs. This allows them to have a higher after-tax cash available, compared to employing another inventory accounting method.
In addition, since HIFO is not used widely and is not accepted by GAAP or IFRS, companies may find that it is suitable for their particular operations. This can give them an edge over their competitors, as HIFO allows them to record profits differently than their competitors, leading to lower taxable income.
However, companies should note the risks of HIFO. HIFO can be more expensive in some cases, such as when the cost of goods sold is lower than the costs incurred to produce them. In such cases, HIFO may not be beneficial as the company may end up having losses rather than gains from its operations. Additionally, companies must also be aware that HMRC, the UK Tax Authority, is strict about HIFO, and businesses must continue to use HIFO for the whole year to enjoy the benefits.
In conclusion, Highest in, First Out (HIFO) is an accounting method that allows companies to realize the highest cost of goods sold, leading to reduced taxable income. Companies, however, must be aware of the risks and consider their particular operations before deciding to use the method.