LIFO and FIFO – Inventory Costs and Output Prices | Financial Statement Analysis

LIFO and FIFO | Declining Inventory Costs and Stable Output Prices | Inventory Valuation | Financial Statement Analysis | Westcliff University | Discussion Question

During a period of rising inventory costs and stable output prices, describe how net income and total assets would differ depending upon whether LIFO or FIFO is applied.

Explain how your answer would change if the company is experiencing declining inventory costs and stable output prices.

We know that the cost of recently purchased items is higher as compared to the old items purchased at the time of rising inventory costs. Under the LIFO method, these condition results in high COGS (Cost of Goods Sold) as the Last in First Out (LIFO) method uses the cost of most recently purchased products.

As compared to the Last In, First Out (LIFO) method firstly uses the old items which leads to a high net income when there is a stable output price (Bragg, 2018). Therefore, the value of total assets & value of ending inventory will be low under LIFO (Last In, First Out ) and high under FIFO ( First In, First Out ) with the rising cost of inventory.

If the company experiences decline in the cost of inventory with a stable price of output Under the LIFO method these condition results in high COGS (Cost of Goods Sold) as the Last in First Out (LIFO) method uses the cost of most recently purchased products. As compared to the Last In, First Out (LIFO) the method firstly uses the old items which leads to a high net income when there is a stable output price.

Therefore, the value of total assets & value of ending inventory will be low under LIFO (Last In, First Out ) and high under FIFO ( First In, First Out ) with the rising cost of inventory.

References

Bragg, t. (2018, December 3). FIFO vs. LIFO accounting. Retrieved from Accounting Tools: https://www.accountingtools.com/articles/2017/5/13/fifo-vs-lifo-accounting

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