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Discussion Board Week 2 Question - Why choose LIFO? DD Studies have found that most companies have adopted LIFO inventory costing. Consider this: assuming a period of increasing prices, using FIFO would charge lower cost inventory to Cost of Goods Sold - which means reporting a higher profit - while keeping the higher cost (newer) items on the Balance Sheet as inventory. So, with FIFO I would show higher profit on the Income Statement, and greater Assets on the Balance Sheet. Why would any company choose LIFO instead of FIFO? Week 2 - Sept 13 - 19 -90526.202009 Explain (in two or three sentences) why a company might choose LIFO. Leave a comment by 09/19/20. After 09/19/20, come back and review the posts and comment in a positive manner!) on TWO of your classmates posts. Leave your followup comments by 09/26/20. You are reminded to observe the rules of Netiquette.

Answer 1

LIFO ( last in first out) as the name suggests is one of the accounting methods, in which the most recent purchased inventory or produced goods is first to be used or sold in case of raw material or finished goods respectively. While using LIFO method, when at the end of the financial year, the inventory is recorded in the financial statement, it will be recorded at the lower price that the older goods were purchased or produced.

Another method is FIFO (first in first out), in this method the goods that were purchased first will be expensed out first and while recording inventory in the financial statements the value of the recent inventory will be recorded.

Both the methods have their own pros and cons.

The reasons for which a company will choose LIFO and not FIFO because:

1. When there is inflation in the economy and price rises of the recent goods purchased, in LIFO, inventory is valued for older purchases when the price was lesser than the recent times. Hence showing lower value of older inventory as ending inventory will reduce the profit of the organisation and hence the organisation will have to pay lesser tax on lower profits.

2. Inventory is valued at lower of market cost or historical cost. When there is inflation, the inventory is valued at their oldest carrying cost. Hence, in LIFO there is a lesser need to write down the inventory during inflation. Inventory is written down when the price of the inventory goes below the carrying value of inventory. Writting down of inventory may have negative results with respect to profitability, solvency, hence, writing down in case of LIFO is hardly undertaken.

3. In LIFO, since the latest goods are first expensed out, it helps in better matching of the revenue earned from the goods with the latest cost of such goods.