While many nations have adopted IFRS, the United States still operates under the guidelines of generally accepted accounting principles (GAAP). If the United States were to ban LIFO, the country would clear an obstacle to adopting IFRS, thus streamlining accounting for global corporations. The method is considered as most suitable one when there is a fall in the prices because the cost that is charged to production will be higher than the replacement cost. However, if the prices are high the same condition will get reversed and as a result, it is not easy to order the same quantity of materials without having sufficient funds. Read out the given article to learn the differences between LIFO and FIFO method of inventory valuation.

1. Let’s explore these methods and understand their importance in the business world.
2. In this case, the store sells 100 of the $50 units and 20 of the $54 units, and the cost of goods sold totals $6,080.
3. But if prices are only rising due to inflation, LIFO inventory valuation might overinflate calculated profit.
4. As a result, you calculate COGs using the cost of the most recent stocks.
5. Higher reported gross income also leads to an inflated representation of profits.

Managing Pipeline Inventory in 2025

Kristen Slavin is a CPA with 16 years of experience, specializing in accounting, bookkeeping, and tax services for small businesses. A member of the CPA Association of BC, she also holds a Master’s Degree in Business Administration from Simon Fraser University. In her spare time, Kristen enjoys camping, hiking, and road tripping with her husband and two children. The firm offers bookkeeping and accounting services for business and personal needs, as well as ERP consulting and audit assistance.

In addition to impacting how businesses assign value to their remaining inventory, FIFO and LIFO have implications for other aspects of financial reporting. Some key elements include income statements, gross profit, and reporting compliance. FIFO and LIFO have different impacts on inventory valuation and financial statements as a result of inflation. In a normal inflationary economy, prices of materials and labor steadily rise.

On the other hand, FIFO stands for ‘first in, first out’ and uses a queue data structure. In a FIFO data structure, the first element added to the queue is processed first. Average cost inventory is another method that assigns the same cost to each item and results in net income and ending inventory balances between FIFO and LIFO. You must keep inventory so you can calculate the cost of the products you sell during the year. The benefits of using the LIFO method are that it helps defer tax and lower inventory write-downs during periods of high inflation. In addition, the benefit of using FIFO is that it results in a higher value of reported earnings and the company’s Net Worth attracting more investors.

Level of Profits Based on Cost of Goods Sold (COGS)

It is a straightforward and easy-to-understand data structure used in many programming languages. Another advantage of FIFO is its suitability for applications where data items need to be processed in a strict order. For instance, in a printer queue, you would want to process the print requests in the order they were received.

Finally, the difference between FIFO and LIFO costs is due to timing. When all inventory items are sold, the total cost of goods sold is the same, regardless of the valuation method you choose in a particular accounting period. Choosing among weighted average cost, FIFO, or LIFO can have a significant impact on a business’s balance sheet and income statement.

FIFO vs LIFO: Comparing Inventory Valuation Methods

In the LIFO method, the most recent purchasing cost is subtracted from its selling price to calculate the reported profit. Using the LIFO method for inventory valuation and accounting lowers your return profit. Dollar-cost averaging involves averaging the amount a company spent to manufacture or acquire each existing item in the firm’s inventory. As inventory is sold, the basis for those items is assumed to be the average inventory cost at the time of their sale. In addition to FIFO and LIFO, which are historically the two most standard inventory valuation methods because of their relative simplicity, there are other methods.

Inventory Valuation using the FIFO method

The right accounting software helps you track your inventory values so you can quickly and easily calculate costs. FreshBooks accounting software lets you organize inventory costs, keep track of shipments, and organize invoices so you can stay on top of vendor payments. Try FreshBooks free to discover how streamlining your inventory process can help you grow your small fifo and lifo method business today. The most significant difference between FIFO and LIFO is its impact on reported income and profits. For FIFO, higher gross income and profits may look more appealing to investors, but it will also result in a higher tax bill.

It ensures that the oldest stock is sold first, reducing the risk of obsolescence. Selecting between FIFO and LIFO depends on your business’s unique circumstances. Both methods have their strengths and weaknesses, and understanding these is key to making an informed decision.