Question

The importance of practicing FIFO method and LIFO method in inventory evaluation for businesses. The assignment needs to present advantages that the businesses will gain from applying FIFO and LIFO methods. In addition, the   assignment should convey logical reasoning for the information presented and clarity in conveying the required points

Answer 1

• FIFO method has these major advantages: It is easy to apply, the assumed flow of costs corresponds with the normal physical flow of goods, no manipulation of income occurs, and the balance sheet amount for inventory is likely to approximate the current market value.
• Purchases at the end of the month or year have no effect on cost of goods sold or net income in FIFO method.
• LIFO depicts the largest cost of goods sold of any of the costing methods in the inflation period because the newest costs charged to cost of goods sold are also the highest costs. The higher the cost of goods sold, the lesser will be the net income.
• LIFO results in a better matching of costs and revenues as compared to other methods.
• The resulting gross margin is a better indicator of organisation's ability to generate income than gross margin calculated with FIFO, which might include substantial inventory (paper) profits.