Final answer:
The limitations of the LIFO inventory valuation method include outdated inventory costs on the balance sheet, reduced reported profits during inflationary periods, non-acceptance under IFRS, and difficulty in comparing with companies using other methods.
Step-by-step explanation:
Limitations of LIFO Method
The Last-In, First-Out (LIFO) method is an inventory valuation approach where the most recently purchased items are assumed to be sold first. One of the key limitations of the LIFO method is that it can result in outdated inventory costs on the balance sheet if prices are rising.
This happens because the older, less expensive items remain in inventory. Another limitation is that it can lead to reduced earnings in times of inflation, as the higher-cost items are being sold first, which increases the cost of goods sold (COGS) and reduces reported profits.
Additionally, LIFO is not universally accepted under all accounting standards, as it is prohibited under the International Financial Reporting Standards (IFRS). This can create inconsistency for multinational corporations.
Moreover, the use of LIFO can complicate comparison with companies that use other inventory methods, such as FIFO (First-In, First-Out).