Advantages and Disadvantages of LIFO
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--FIFO means "first in, first out." This follows the assumption that the first items received into inventory are the first items sold. In some cases, this may not be true because companies often have to sell new items after old ones have become outdated. Businesses using FIFO show themselves as more profitable on paper.
--LIFO mean "last in, first out." This method requires counting the cost of goods sold at the current price regardless of the amount paid for the inventory. If the prices increase, cost of goods sold will be higher and profit will be lower. This also allows the tax burden to be lower. This method is typically more popular because companies are always attempting to decrease their tax liability.
--FIFO inventory costing during an inflationary period will result in increasing costs, meaning the items purchased first were cheaper. This decreases Costs of Goods Sold and increases Profit. Income tax is larger and the value of the remaining inventory is higher.
--LIFO inventory costing during an inflationary period will result in rising costs, meaning that items recently purchased are more expensive. This increases the Costs of Goods Sold and decreases Profit, resulting in a lower tax burden. The value of any unsold inventory is lower.
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Solution Summary
This solution discusses the relative advantages and disadvantages of LIFO versus FIFO inventory.
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Actually, FIFO follows most inventory flows more realistically than does LIFO. That is, companies will try to sell their older inventory before they sell their newer stock. However, by matching current period costs with current period revenues, LIFO allows the company to conform to the matching principle of generally accepted accounting principles (Kokemuller, 2014). Furthermore, International Financial Reporting ...
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