However, the final assessment of both LIFO FIFO methods is considered to be subjective. This is the key difference between both methods. This results in higher profits and higher taxes in times of inflation, as the cost of goods sold is lower, increasing the taxable income. Due to this, the COGS is based on the oldest inventory purchases or production costs, which are usually lower. On the other side, FIFO or First-In, First-Out method assumes that the oldest inventory items purchased or produced are sold first. As a result, this may ultimately reduce the taxable income. This results in lower profits and lower taxes during inflation, as the cost of goods sold is higher. ![]() ![]() Since the LIFO or the Last-In, First-Out method assumes that the most recently purchased or produced inventory items are sold first, it leads to the valuation of the cost of the goods sold (COGS) based on the most recent inventory costs, which are usually higher due to inflation or other factors. What Is the Difference Between LIFO and FIFO?įirst-in, First-Out, and Last-In, First-Out are two common inventory accounting methods relied on by businesses to track and manage their inventory, and the cost of goods sold. Read this informative article and opt for the method best suiting your business! The stock valuation technique you pick will rely upon your assessment circumstance, stock stream, and recordkeeping prerequisites. Also known as 'Last-In, First-Out', LIFO assumes that the most recently added items to your inventory will be the ones that sell first. FIFO, which stands for 'First-In, First-Out', assumes that the first items to enter your inventory are also the first items you sell. ![]() These are the two most common approaches to inventory valuation. When it comes to FIFO vs LIFO, and assessing which method is better for inventory valuation, businesses find it difficult to choose the right one.
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