Inventory Valuation Comparison - FIFO vs LIFO

Choose FIFO or LIFO and explain why

A supermarket selling perishable goods
➛ FIFO - Older goods must be sold first to avoid spoilage.

A manufacturing firm facing high inflation
➛ LIFO - Matches current costs with revenue and reduces taxable income.

A company wanting higher reported profits
➛ FIFO - Lower COGS results in higher profit.

A company operating under IFRS
➛ FIFO - LIFO is not permitted under IFRS.

Inventory purchases
50 units @ $8
50 units @ $10

Units sold
60

FIFO Calculation
50 units @ $8 = $400
10 units @ $10 = $100
FIFO COGS = $500

LIFO Calculation
50 units @ $10 = $500
10 units @ $8 = $80
LIFO COGS = $580

Comparison
FIFO COGS is lower
LIFO COGS is higher
Profit is higher under FIFO

Answer in 3-4 sentences
Explain using FIFO and LIFO.

Inventory valuation methods can significantly change reported profit even when sales remain the same.

Inventory valuation methods affect reported profit even when sales are the same because they assign different costs to COGS. FIFO uses older, cheaper costs during inflation, resulting in higher profits. LIFO uses newer, higher costs, which reduces profit. Therefore, the choice of inventory method directly impacts financial statements and decision-making.

⚠ Answers may vary but must reference COGS, profit, and method choice.

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?
➛ FIFO - Ending inventory reflects recent purchase prices.

Which method reduces taxable income?
➛ LIFO - Higher COGS lowers taxable profit.

Can the company use both methods? Why or why not?
➛ No - Accounting standards require consistency in inventory valuation.

Which method would you recommend and why?
➛ FIFO for financial reporting accuracy
➛ LIFO for tax savings | where allowed

Which method results in higher profit during inflation?
➛ FIFO

Which method results in higher COGS during inflation?
➛ LIFO

Which method values inventory at recent costs?
➛ FIFO

Is LIFO allowed under IFRS?
➛ No

What is the LIFO Reserve?
➛ The difference between FIFO and LIFO inventory values.

---

Weighted Average ➧ Here