Inventory Valuation Comparison - FIFO vs LIFO
Module 4:
Inventory & Costing
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Compare FIFO and LIFO inventory valuation methods
➛ Calculate COGS and Ending Inventory using both methods
➛ Analyze the impact of FIFO and LIFO on profit
➛ Explain the effect of each method on financial statements
➛ Identify which method is suitable in different economic conditions
➛ Apply FIFO and LIFO to real-world business scenarios
Key Vocabulary
➛ FIFO | First In, First Out
➛ LIFO | Last In, First Out
➛ Inventory Valuation
➛ Cost of Goods Sold
➛ Ending Inventory
➛ Inflation
➛ Gross Profit
➛ LIFO Reserve
FIFO vs LIFO - Core Concept
Method
FIFO
LIFO
FIFO
LIFO
Assumption
Oldest inventory is sold first
Newest inventory is sold first
Oldest inventory is sold first
Newest inventory is sold first
Both methods are accounting assumptions and may not reflect actual physical flow.
Side-by-Side Numerical Comparison
Inventory Data
Date
Purchase 1
Purchase 2
Purchase 3
Purchase 1
Purchase 2
Purchase 3
Units
100
100
100
100
100
100
Cost per Unit
$10
$12
$14
$10
$12
$14
FIFO Calculation
COGS
100 × $10 = $1,000
100 × $12 = $1,200
FIFO COGS = $2,200
Ending Inventory
100 × $14 = $1,400
LIFO Calculation
COGS
100 × $14 = $1,400
100 × $12 = $1,200
LIFO COGS = $2,600
Ending Inventory
100 × $10 = $1,000
Impact on Financial Statements
Income Statement | Inflation Environment
Method
FIFO
LIFO
FIFO
LIFO
COGS
Lower
Higher
Lower
Higher
Gross Profit
Higher
Lower
Higher
Lower
Balance Sheet
Method
FIFO
LIFO
FIFO
LIFO
Inventory Value
Higher
Lower
Higher
Lower
Accounting Standards & Compliance
Standard
IFRS
GAAP
IFRS
GAAP
FIFO
Allowed
Allowed
Allowed
Allowed
LIFO
Not allowed
Allowed
Not allowed
Allowed
Businesses using LIFO must disclose LIFO Reserve.
Comparison Table | Complete the Table
Feature
Inventory sold first
COGS during inflation
Profit level
Inventory value
IFRS allowed
Inventory sold first
COGS during inflation
Profit level
Inventory value
IFRS allowed
FIFO
LIFO
Method Selection
Choose FIFO or LIFO and explain why
➛ A supermarket selling perishable goods
➛ A manufacturing firm facing high inflation
➛ A company wanting higher reported profits
➛ A company operating under IFRS
Calculation Challenge
Inventory purchases
50 units @ $8
50 units @ $10
Units sold
60
Tasks
Calculate COGS using FIFO
Calculate COGS using LIFO
Compare the results
Critical Thinking
Answer in 3-4 sentences
Inventory valuation methods can significantly change reported profit even when sales remain the same.
Explain using FIFO and LIFO.
Mini Case Study
A retail company operates in an inflationary economy. Management wants accurate inventory values but also wants to manage tax payments.
Questions
➛ Which method provides more realistic inventory values?
➛ Which method reduces taxable income?
➛ Can the company use both methods? Why or why not?
➛ Which method would you recommend and why?
Quick Quiz
➛ Which method results in higher profit during inflation?
➛ Which method results in higher COGS during inflation?
➛ Which method values inventory at recent costs?
➛ Is LIFO allowed under IFRS?
➛ What is the LIFO Reserve?
Answers ➧ Here
Weighted Average ➧ Here