Question

With regard to inventory cost flow, compare and contrast FIFO with LIFO with examples to illustrate the points better.

Answer 1

FIFO and LIFO are cost layering methods used to value the cost of goods sold and ending inventory

Issue	FIFO	LIFO
Material Flow	In most businesses, the actual flow of materials follows FIFO, which makes this a logical choice.	There Are Few businesses where the oldest item are kept in stoke whiler newer item are sold first
Inflation	If costs are increasing, the first items sold are the least expensive, so your cost of goods sold decreases, you report more profits, and therefore pay a larger amount of income taxes in the near term.	If costs are increasing, the last items sold are the most expensive, so your cost of goods sold increases, you report fewer profits, and therefore pay a smaller amount of income taxes in the near term.
Deflation	If costs are decreasing the first item sold are expensive so your cost of goodssold are increases you report fewer profit .and therefor pay a small amount of income tax	If costs are decreasing, the last items sold are the least expensive, so your cost of goods sold decreases, you report more profits, and therefore pay a larger amount of income taxes in the near term.
Financial reporting	There are no GAAP or IFRS restrictions on the use of FIFO in reporting financial results.	IFRS does not all the use of the LIFO method at all. The IRS allows the use of LIFO, but if you use it for any subsidiary, you must also use it for all parts of the reporting entity.
Record keeping	There are usually fewer inventory layers to track in a FIFO system, since the oldest layers are continually used up. This reduces record keeping.	There are usually more inventory layers to track in a LIFO system, since the oldest layers can potentially remain in the system for years. This increases record keeping.
Reporting fluctuations	Since there are few inventory layers, and those layers reflect recent pricing, there are rarely any unusual spikes or drops in the cost of goods sold that are caused by accessing old inventory layers.	There may be many inventory layers, some with costs from a number of years ago. If one of these layers is accessed, it can result in a dramatic increase or decrease in the reported amount of cost of goods sold.