LIFO vs FIFO: Which is Better?

What are the main differences between LIFO and FIFO?

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

Which method is better for tax purposes?

LIFO can be beneficial in times of rising prices as it results in lower taxable income, while FIFO may lead to higher taxes.

Are there any industries that prefer one method over the other?

Yes, industries like retail often prefer FIFO to ensure older stock sells first, while some manufacturing sectors may use LIFO.

Can you give me an example of how each method affects financial statements?

Sure! Under LIFO, the cost of goods sold is higher during inflation, reducing net income. FIFO shows higher profits as older, cheaper costs are matched against current revenues.

What should a business consider when choosing between LIFO and FIFO?

Businesses should consider tax implications, cash flow, inventory management, and how each method aligns with their financial strategy.