Final answer:
The major limitation of LIFO inventory accounting is the complexity and time needed to track inventory with frequently changing unit costs, which can lead to distorted inventory values and less realistic book income. Additionally, LIFO is not accepted under IFRS, limiting its international use.
Step-by-step explanation:
Limitations of LIFO Accounting
The question regards the limitations of the Last-In, First-Out (LIFO) inventory accounting method. One significant limitation of LIFO occurs when a company has numerous individual units of inventory and the costs of these units change frequently during an accounting period.
In such situations, tracking and maintaining accurate records of inventory costs can be extremely complex and time-consuming. Under LIFO, the last items added to the inventory are the first to be used in the cost of goods sold (COGS), which can lead to distorted inventory value on balance sheets, especially during times of inflation or fluctuating prices.
Moreover, the LIFO method can result in less realistic book income since the COGS may be inflated with more recent, higher-priced inventory, thereby reducing the reported profit.
This can also affect business decisions and financial analysis. Lastly, it is important to mention that LIFO is not accepted under International Financial Reporting Standards (IFRS), which limits its use internationally and can complicate the financial statements of companies operating in multiple countries.