How does inflation affect LIFO and FIFO?

Can you explain how inflation impacts LIFO and FIFO inventory methods?

Sure! Inflation affects LIFO (Last In, First Out) and FIFO (First In, First Out) differently. With LIFO, the most recently purchased items are sold first, which means during inflation, the cost of goods sold is higher, leading to lower taxable income.

What about FIFO? How does it handle inflation?

FIFO sells the oldest inventory first. In times of inflation, this means that the cost of goods sold is lower, as older, cheaper items are sold first, resulting in higher taxable income compared to LIFO.

Which method is generally better during inflation?

It depends on the business's financial strategy. LIFO can reduce tax liability during inflation, while FIFO may show higher profits on financial statements.

Are there any other factors to consider when choosing between LIFO and FIFO?

Yes, factors like cash flow, inventory turnover, and the nature of the business's products can also influence the choice between LIFO and FIFO.