FIFO vs LIFO

FIFO and LIFO accounting methods are used for determining the value of unsold inventory, the cost of goods sold and other transactions like stock repurchases that need to be reported at the end of the accounting period. FIFO stands for First In, First Out, which means the goods that are unsold are the ones that were most recently added to the inventory. Conversely, LIFO is Last In, First Out, which means goods most recently added to the inventory aresold first so the unsold goods are ones that were added to the inventory the earliest. LIFO accounting is not permitted by the IFRS standards so it is less popular. It does, however, allow the inventory valuation to be lower in inflationary times.

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FIFO
First in, first out Unsold inventory is comprised of goods acquired most recently. There are no GAAP or IFRSrestrictions for using FIFO; both allow this accounting method to be used. If costs are increasing, the items acquired first were cheaper. This decreases the cost of goods sold (COGS) under FIFO and increasesprofit. The income tax is larger. Value of unsold inventory is also higher. Converse to the inflation scenario,accounting profit (and therefore tax) is lower using FIFO in a deflationary period. Value of unsold inventory, is lower. Since oldest items are sold first, thenumber of records to be maintained decreases.

LIFO
Last in, first out Unsold inventory is comprised of the earliest acquired goods. IFRS does not allow using LIFO foraccounting.

Stands for: Unsold inventory:

Restrictions:

Effect of Inflation:

If costs are increasing, then recently acquired items are more expensive. This increases the cost of goods sold (COGS) under LIFO and decreases the net profit. Theincome tax is smaller. Value of unsold inventory is lower. Using LIFO for a deflationary periodresults in both accounting profit and value of unsold inventory being higher.

Effect of Deflation:

Record keeping:

Since newest items are sold first, the oldest items may remain in the inventory for many years. This increases the number of records to be maintained. Goods from number of years ago may

Fluctuations:

Only the newest items remain in the

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FIFO
inventory and the cost is more recent. Hence, there is no unusual increase or decrease in cost of goods sold.

LIFO
remain in the inventory. Selling them may result in reporting unusual increase or decrease in cost of goods.

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FIFO vs LIFO It is essential for a firm to keep count of the stock that is being purchased and sold in order to observe and determine the cost of inventory for the period. The calculation of this inventory cost can be done in a number of ways; two of the methods have been discussed in this article. It is important to note that the method of inventory cost calculation must be chosen on grounds that it provides the most realistic picture of the firms financial position, as this calculated figure will impact the cost of goods sold figure recorded in the income statement and the inventory value on the balance sheet, which in turn can impact financial decision making. The following article will give a clear picture of the two methods of inventory cost calculation, highlighting the differences between the two. What is FIFO? FIFO stands for first in first out, and under this method of inventory valuation, the inventory that was bought first will be utilized first. For example, if I buy 100 units of stock on the 1st December and purchase 200 units of stock on the 15th December the first to be used will be the 100 units of stock I bought on the 1st December as that was what I purchased first. This method of inventory valuation is usually used when perishable items such as fruits, vegetables or dairy products are sold, since it is essential to sell the first purchased goods as soon as possible before they perish. What is LIFO? LIFO stands for last in first out and under this method of inventory valuation, the inventory that was bought last will be utilized first. For example, if I purchase 50 units of stock on the 3rd January, 60 units of stock on the 25th January, and further 100 units of stock on the 16th February, the first stock to be utilized under the LIFO method would be the 100 units of stock I purchased on the February 16th since it was the last to be purchased. This method of stock valuation is most suitable for goods that do not expire, perish or become obsolete in a short period as it requires the goods bought to be held in stock for a longer period. An example for such goods can be coal, sand, or even bricks where the seller will always sell the sand, coal or bricks that were stocked on top first. FIFO vs LIFO When comparing the LIFO and FIFO, there are no similarities between the two except that they are both inventory valuation methods validated by accounting policies and principles, and can be used for stock valuation depending on how well they represent the firms financial position. The main differences between the two methods of valuation are the effect that they have on the firms income statements and balance sheet. In times of inflation, if the LIFO method of valuation is used, the stock that is sold will cost higher than the stock that remains. This will result in a higher COGS and lower inventory value in the balance sheet. If the FIFO method is used during inflation, the stock that is sold will cost lower than the stock held, which will lower the COGS and increase the inventory value in the firms balance sheet. The other difference between the two is in how they impact tax. LIFO method will result in higher COGS and will result in lower tax (since earnings are lower when cost of goods are high), and the FIFO method will result in higher tax since COGS is lower (earnings will be higher). In a Nutshell: What is the difference between LIFO and FIFO? A firm will use either the LIFO or FIFO method to keep count of the stock that is being purchased and

sold, in order to observe and determine the cost of inventory for the period. FIFO stands for first in first out, and under this method of inventory valuation, the inventory that was bought first will be utilized first, and is the most appropriate method for perishables. LIFO stands for last in first out, and under this method of inventory valuation, the inventory that was bought last will be utilized first. Goods such as sand, coal and bricks use this method. The main differences between the two methods of valuation are the effect that they have on the firms income statements and balance sheet.