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
MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
- Concept and Nature of Intellectual Property Rights – Explained in Detail | Business Law - January 30, 2024
- Management Information Systems Online Degree – Courses, Colleges, and Careers in MIS - January 16, 2024
- When all the numbers between 0 and 100 in a range should be displayed in red color apply? - January 14, 2024