What are the differences between LIFO and FIFO inventory methods?

What are the differences between LIFO and FIFO inventory methods?

LIFO (Last In, First Out) means the most recently purchased items are sold first, while FIFO (First In, First Out) means the oldest items are sold first.

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

Sure! In FIFO, if you buy 100 units at $10 and then 100 units at $12, when you sell 100 units, you sell the $10 units first. In LIFO, you sell the $12 units first.

What are the advantages of using LIFO over FIFO?

LIFO can provide tax benefits during inflation, as it matches recent higher costs against revenues, reducing taxable income.

Are there any disadvantages to using LIFO?

Yes, LIFO can lead to outdated inventory values on the balance sheet and may not reflect the actual flow of goods.