Question

whats the difference between lifo and fifo

Answer 1

Ans:

Last in First Out (LIFO) and First in First Out (FIFO) both are method of inventory valuation. Difference between both are discussed as under:

In Last in First Out (LIFO), as the name suggest last item added to the inventory will be sold/consumed first. Whereas in First in First Out (FIFO) oldest item in the inventory will be sold/consumed first.

LIFO method of inventory valuation is less popular because valuation under this method is a complex process whereas FIFO is much easier method of inventory valuation because oldest goods are sold/consumed first and inventory in hand will be the latest items which can be valued easily.

In LIFO method, Oldest items will be in the closing stock and in case of FIFO method newest item will be in the closing stock.

In case of inflation, cost of goods sold are higher under LIFO method which decreases profits and income tax liability. But in FIFO, Cost of goods sold will be lower which makes higher profits and higher tax liability,

In Case of deflation, under LIFO method cost of goods sold will be lower and tax liability will be higher whereas in FIFO tax liability will be lower as cost of goods sold will be valued higher.

LIFO method of Inventory valuation is not accepted as per GAAP and IFRS whereas FIFO is completely valid method of inventory valuation and accepted by IFRS.

LIFO method of inventory valuation is less practical in comparison to FIFO. For e.g. in case of Perishable goods, oldest items in the inventory are held in closing stock and latest items are sold first, in such a case items in closing stock will be of no use and will have very less or nil realizable value which makes LIFO method impracticable.