Under the conformity rule, companies who use the method for tax reporting, are required by the IRS to also use it in their financial statements.

LIFO Cost Method

Explanation: The LIFO conformity rule states that the same inventory cost method be used both in the financial statement as well as in the IRS income tax returns.

The rule is used to discourage companies from using the LIFO cost method as it reduces the overall value of the company's assets.

The rule is also designed to prevent organizations from using LIFO accounting to reduce the amount of their taxable income, while using a different inventory cost flow method (such as FIFO) to derive a higher income figure in their financial statements.

Last-in, First-out inventory method

Explanation:

The inventory conformity rule states; If a firm uses the Last-in, First-out method or cost flow assumption for its tax reporting, it must use the same method for its financial reporting. The rule which was put in place by the Internal Revenue Service because firms used Last-in, First-out to report a low taxable income but used First-in, First-out or other methods to report a high income in their financial statements. This rule which was made by the Internal Revenue Service reduced the use of Last-in, First-out by firms in their tax information report and financial statements. If the method used for the two activities do not coincide for whatsoever reason, traces of fraud and its consequences might happen. A firm cannot change it'd method once elected, during an accounting period.

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