What is the difference between FIFO and LIFO in inventory management?

What is the difference between FIFO and LIFO in inventory management?

FIFO stands for 'First In, First Out,' meaning the oldest inventory items are sold first. LIFO, or 'Last In, First Out,' means the most recently acquired items are sold first.

Can you give me an example of how each method works?

Sure! In FIFO, if you have 100 units bought at $10 each and 100 units bought at $12 each, when you sell 100 units, you sell the $10 units first. In LIFO, you would sell the $12 units first.

What are the advantages of using FIFO over LIFO?

FIFO can provide a more accurate reflection of inventory costs during inflation, as older, cheaper costs are matched against current revenues, leading to higher profits.

Are there any tax implications for choosing one method over the other?

Yes, LIFO can lead to lower taxable income during inflation, as it matches higher costs against revenues. However, it may not be allowed under certain accounting standards.