Difference between FIFO and LIFO
Basis |
FIFO |
LIFO |
---|---|---|
Method | The method is based on the First in, First Out rule. | The method is based on the Last in First Out rule. |
Subject Matter | The method is based on selling those items first that are stored for the longest. | The method is based on selling those goods first that were bought recently. |
Ideal For | This method is ideal for those items that are of a perishable nature. | The method is ideal for those items that are of a homogeneous nature and do not have expiration criteria. |
Cost Reflection | The FIFO method reflects historical costs. | The LIFO method shows the current market condition. |
Result on Inventory | The FIFO method shows an accurate value for ending inventory since older items have been consumed first, while the newest items show the current market prices. | The LIFO method doesn’t provide an accurate inventory valuation as the valuation is much lower than inventory items at today’s prices. |
Result on COGS | The FIFO method may result in lower costs of goods sold. | The LIFO method may result in higher costs of goods sold. |
Effect on Tax | The FIFO method can lead to paying a higher tax as the gap between profit and cost is larger. | The LIFO method can appear to be a tax-saving method in certain jurisdictions |
Effect on Inventory Management | The FIFO method helps to reduce inventory obsolescence. | The LIFO method may result in inventory obsolescence. |
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