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Explain the difference between the FIFO and LIFO inventory costing methods. In a period of rising...

Explain the difference between the FIFO and LIFO inventory costing methods. In a period of rising prices, which method would result in a higher net income and why? Why might a company choose the method that would result in a lower net profit? Participate in follow-up discussion by discussing which inventory method you would recommend and why.

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FIFO vs. LIFO method of Inventory costing

FIFO method of inventory costing issues the goods based on first purchase first out principle. It considers the earliest purchase for issue purpose and the latest purchase is part of closing inventory.

LFIO method of inventory is the opposite of FIFO method. It issues the latest goods purchased and the earlier purchase is part of closing inventory.

In a period of rising prices, FIFO will result in a highest net income due to lower cost of goods sold and higher closing inventory valuation. The closing stock is valued at latest purchase price which is rising and hence net income will be higher

A Company might choose the inventory method which results in a lower net profit to reduce the tax liability because tax is payable on net income

The recommended method of inventory depends on the nature of business and need of management. However FIFO method is recommended in general due to following reasons

· It helps in valuing inventory at current replacement cost

· It helps in accounting the cost as per flow of physical goods

· It helps in ensuring inventories are moving

· It is the most widely used inventory method by all business because it is simplistic

ekkarill92 answered 2 years ago
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