Difference between FIFO & LIFO Method

FIFO and LIFO are two commonly used methods of inventory valuation in accounting. They differ in how they assign costs to the items in inventory and calculate the cost of goods sold (COGS). Here's an explanation of the differences between FIFO and LIFO:

FIFO (First-In, First-Out):

Under the FIFO method, it is assumed that the first items purchased or produced are the first ones sold.

The cost of the oldest inventory items is assigned to the COGS, while the cost of the most recent purchases or production is assigned to the ending inventory.

FIFO mimics the actual flow of goods in many industries, where older items tend to be sold or used first.

During periods of rising prices, FIFO tends to result in a higher ending inventory value and lower COGS compared to other methods.

LIFO (Last-In, First-Out):

With the LIFO method, it is assumed that the most recently purchased or produced items are the first ones sold.

The cost of the most recent inventory purchases or production is assigned to the COGS, while the cost of the oldest items is assigned to the ending inventory.

LIFO is less common than FIFO but is still used by certain industries or for tax purposes.

During periods of rising prices, LIFO tends to result in a lower ending inventory value and higher COGS compared to other methods. This is because the higher cost of recent purchases is assigned to COGS.

It's important to note that the choice between FIFO and LIFO can have a significant impact on a company's financial statements, particularly the inventory valuation, COGS, and profitability figures. The selection of the appropriate method depends on various factors such as industry practices, regulatory requirements, tax considerations, and management's judgment. It's also essential to apply the chosen method consistently over time to maintain comparability in financial reporting