Explain the difference between FIFO and LIFO. Try to indicate the different consequences if a company...

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Explain the difference between FIFO and LIFO. Try to indicate the different consequences if a company...

Explain the difference between FIFO and LIFO. Try to indicate the different consequences if a company uses them.

business accounting

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Answer 1

Answer #1

Solution: The basic difference between both methods of inventory valuation is:

Under FIFO method, latest purchased inventory stock is remained in hand at the end of the year.
Under LIFO method, old purchased inventory stock is remained in hand at the end of the year.

If a company uses these methods following consequences can occur:

FIFO & LIFO
Under FIFO present rate of purchase increases than, value of ending inventory will be greater than the value computed under LIFO, and COGS will be lower than the other method. Hence, net profit will be greater than the profit computed under LIFO
Under FIFO, if present rate of purchase decreases than, value of ending inventory will be lower than the value computed under LIFO, and COGS will be higher than the other method. Hence, net profit will be lower than the profit computed under LIFO method.

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Answer 2

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