FIFO vs LIFO
Published: 2021-04-24 14:05:19

<p>The cost of products sold is calculated using the FIFO and LIFO formulas. FIFO (First-In, First-Out) assumes that the oldest items in a company's inventory were sold first and bases production costs on that assumption. The LIFO (Last-In, First-Out) approach assumes that the most recent items in a company's inventory have been sold first, and it bases its calculations on those prices<p/>
**Here’s What We’ll Cover:**
*What Is the Difference Between FIFO and LIFO?*
*Which Method Is Better FIFO or LIFO?*
*How Do You Calculate FIFO and LIFO?*
*Is LIFO Allowed Under GAAP?*


##What Is the Difference Between FIFO and LIFO?
<p>The process by which a business assesses its inventory costs has an effect on its earnings. The sum of earnings declared by a corporation has a direct impact on their income taxes.

Inventory refers to products that have been bought with the purpose of reselling them, as well as goods that have been manufactured (including labor, material & manufacturing overhead costs).

The terms FIFO and LIFO are merely assumptions. The methods aren't connected to the track in any way.<p/>

##Which Method Is Better FIFO or LIFO?
<p>In comparison to LIFO, FIFO is thought to be a more straightforward and reliable method of measuring cost of goods sold. The following are the reasons.

The “First-In, First-Out” approach is simpler to comprehend and execute by its very design. Since older inventory can become redundant and lose value, most companies offload the oldest items first anyway. As a result, FIFO simply tracks the normal flow of inventory, implying that<p/>

#How Do You Calculate FIFO and LIFO?
<p>Determine the cost of your oldest inventory to measure COGS (Cost of Goods Sold) using the FIFO process. Multiply the cost by the number of items sold.

Determine the cost of your most recent inventory to measure COGS (Cost of Goods Sold) using the LIFO process. Multiply the cost by the number of items sold.

The prices that a business pays for its inventory fluctuate a lot. These variations<p/>

#Is LIFO Allowed Under GAAP?
<P>Yes, according to GAAP, LIFO is permitted.

The term "Generally Accepted Accounting Principles" (GAAP) refers to the collection of rules that govern accounting procedures in the United States. It was created so that all companies could adhere to the same set of laws. GAPP establishes guidelines on a broad range of issues, including assets and liabilities, foreign exchange, and the presentation of financial statements. LIFO is legal under GAAP.
LIFO is not allowed as an accounting procedure outside of the United States. This is why some American businesses use the LIFO system on their financial statements when switching to FIFO for foreign operations.

The IFRS (International Financial Reporting Standards) Foundation's guidelines must be followed by the majority of other nations.<P/>

#Conclusion – FIFO vs LIFO:
<p>Inventory management and accounting are critical areas of emphasis, especially for large manufacturing and trading companies. The FIFO method takes a more practical approach, as most businesses will choose to sell or move older inventory first to avoid obsolescence.The LIFO method, on the other hand, is an irrational method since it rarely replicates real physical inventory movement. This is why the FIFO approach is more widely used than the LIFO method. Other inventory valuation methods that agencies may use (subject to jurisdictional GAAP regulations) include the basic identification method and the weighted average method.<p/>