Fifo and Lifo Inventory Methods Essay Example

costs of goods are lower than other costing methods when inventory costs are increasing. This is because FIFO is based on the oldest costs. This creates a higher gross profit, which gives a positive representation of the company to investors and managers.

Additionally, the reported ending inventory will be higher than other costing methods because the most recent costs are used. This also looks good on the balance sheet. When inventory costs are decreasing, the cost of goods sold will be higher; this due to the oldest costs being used first. It follows that the gross profit will also be lower since the costs of goods sold are lower. The ending inventory will also be lower with decreasing inventory costs. This means FIFO offers the higher gross profits and ending inventory when inventory costs are increasing and lower gross profits and ending inventory when costs are decreasing.

LIFO Cost Inventory Method LIFO is another popular method of inventory costing methods. Under LIFO, cost of goods is based on the last costs to go into inventory (Harrison, Horngren & Thomas, 2010, p. 352). For accounting purposes, the unit price will be based on the cost incurred on the last purchase of inventory until those items are no longer in inventory. Future sells would then use the next newest price of inventory stock. Using the example above of Company A, we can illustrate the cost of goods sold and ending inventory using the LIFO costing method. Compare the results with the FIFO example above.