Question

One of the challenges of inventory management is the issue of deterioration and spoilage of stock. Discuss four (4) merits and demerits of the FIFO and LIFO methods of issuing stock

Answer 1

1. First in First Out (FIFO)

Four Merits of FIFO are as follows:

• FIFO method saves time and money in calculating exact cost of inventory being sold.
• FIFO saves stock from obsolescence it use old inventory first.
• FIFO method is simple and easy to understand by anyone. It don't require any expertise knowledge in accounting to make it clear.
• FIFO ensures that oldest stock is used first to reduce cost.

Four Demerits of FIFO are as follows:

• At the time of inflation FIFO method results in generating higher profits due to which tax liabilities  incur.
• FIFO method shall not be used if the goods purchased have flexible prices.
• In the situation of " Hyper Inflation" FIFO method shall not be suitable.
• It tends to overstate gross margin of company.

2. Last in First Out (LIFO) :

Four Merits of LIFO are as follows:

• LIFO uses matching most recent cost against current revenue.
• Reduces tax burden of company in the situation of inflation.
• It facilitate total recovery of material cost.
• LIFO method is suitable when prices are rising.

Four Demerits of LIFO are as follows:

• Current prices are not being reflected by inventory valuation.
• LIFO uses more amount of clerical work to be performed.
• LIFO is mostly not acceptable by tax authorities.
• Comparison of similar batch goods becomes difficult in LIFO method.