LIFO

LIFO assumes newest inventory is sold first
➛ True

LIFO results in lower profit during inflation
➛ True

LIFO is allowed under IFRS
➛ False

LIFO matches current costs with current revenue
➛ True

1. LIFO stands for Last In, First Out

2. Under LIFO, the oldest inventory remains in ending inventory

3. LIFO results in higher COGS during inflation

Inventory purchases
60 units @ $5
80 units @ $6

Units sold
100

Tasks
Calculate COGS using LIFO
Calculate Ending Inventory

Step 1 - Apply LIFO Order
First 80 units @ $6
Next 20 units @ $5

Step 2 - Calculate COGS
80 × $6 = $480
20 × $5 = $100
COGS = $580

Step 3 - Calculate Ending Inventory
Remaining units ➧ 40 units @ $5
Ending Inventory = $200

Explain in 3-4 sentences

➛ Why some businesses prefer LIFO for tax purposes

➛ One disadvantage of LIFO in financial reporting

Some businesses prefer LIFO because it results in higher COGS and lower taxable income during inflation. This helps reduce tax payments. However, LIFO can undervalue ending inventory because older costs remain on the balance sheet, reducing financial statement accuracy.

⚠ Answers may vary but must mention tax benefit and outdated inventory values.

A manufacturing company operates in a high-inflation economy and wants to reduce taxable income while matching current costs to revenue.

Questions

Which inventory valuation method should it use?
➛ LIFO

How does this method affect COGS?
➛ LIFO increases COGS during inflation by using recent higher costs.

Why is profit lower under this method during inflation?
➛ Higher COGS reduces gross profit.

Why might this method not be allowed in some countries?
➛ Because it can distort inventory values and is not permitted under IFRS.

What does LIFO stand for?
➛ Last In, First Out

Which inventory is sold first under LIFO?
➛ The most recent inventory

How does LIFO affect COGS during inflation?
➛ It increases COGS

Is LIFO allowed under IFRS?
➛ No

Name one disadvantage of LIFO.
➛ Inventory values may be outdated / Not allowed under IFRS / Lower comparability

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FIFO vs LIFO Comparison ➧ Here