Final answer:
The LIFO adjustment in accounting is used internally to convert inventory values from the LIFO basis to the FIFO basis. This allows companies to compare financial results and manage internal reports that might require FIFO inventory valuations for consistency.
Step-by-step explanation:
LIFO Adjustment in Accounting
The LIFO adjustment is a concept used in the field of accounting. When a company uses the Last In, First Out (LIFO) method for inventory accounting, it records the most recently produced or purchased items as sold first. However, for internal reporting or comparison purposes, a company may want to convert its LIFO inventory values to those that would have resulted had it been using another inventory accounting method.
Therefore, the LIFO adjustment is used internally to convert the inventory to the FIFO basis. FIFO, which stands for First In, First Out, assumes that the oldest items in inventory are sold first. This adjustment is often made to better understand financial results, compare performance, and for other internal management purposes. It can also align the internal financial information with external reports that use a different inventory valuation method.
It is important to note that while LIFO and FIFO are two of the most common inventory valuation methods, the weighted average basis is another method companies use to smooth out price fluctuations over time. Unlike the LIFO adjustment, which switches from LIFO to FIFO, 'converting to the weighted average basis' is different and would require its own process and adjustments.