FIFO vs LIFO – Which is the Best Valuation Inventory Method?

FIFO vs LIFO

Inventory

In simple words, any company acquires raw material, adds more products for the betterment and then sells produced items. The amount that remains after-sale and subtracting the production cost known as inventory.  

FIFO and LIFO inventory

Usually, any company uses two inventory methods: first-in, first-out (FIFO) and last-in, first-out (LIFO), to calculate the inventory cost. FIFO calculator or LIFO calculator can be used to avoid any miscalculation. Moreover, they have a direct impact on financial statements, the balance sheet of the company at the end of the year and income statement.  

Comparison between FIFO and LIFO

Standings

FIFO

LIFO

Represents to:First in, first outLast in, first out
How to sell the products?It deals with the selling of all the oldest products first. It deals with the selling of all recent or new products. 
ValuationIn FIFO, all the older items will be consumed first. Companies that are based on FIFO naturally use their eldest inventory and won’t let it be spoiled in stock. It means that the valuation of COGS accurately reveals its production list.LIFO consumes new items to value COGS. Older inventory will be outdated after some time.   As a result, it fails to display a precise value of inventory. Moreover, LIFO is not realistic as companies won’t leave their older inventory in stock to be ruined.
Valuation in Inflation case:FIFO leaves newer products and deals with the older product first. Therefore, it can raise net income as evident by the FIFO calculator.  Old inventory that was picked up for a lower cost but now is more valuable.  All those products that are older were cheaper, and they were going to be sold later. In the case of inflation, the present COGS will be high while using LIFO as evident by the LIFO calculator.  Now the new inventory is costlier. Therefore, profit and net income will be less.
Valuation in Deflation case: Net profit will decrease, and because of that tax will also decrease. The decrease in the net profit can be calculated with the FIFO method calculator.In the case of deflation income tax will increase because of the increase in the net profit. increase in the net profit can be calculated with the LIFO method calculator.
Limitations:GAAP puts no restrictions on the use of FIFO. In the same way, IFRS, which is an international standard, also allows its use.  Now the question is how to calculate FIFO at the end of the year? FIFO and LIFO calculators are recommended for this purpose. They are free to use and available onlineIFRS does not permit calculations utilizing LIFO. But if you want to get an idea about it and have a question in mind about how to calculate LIFO to compare the ending result with FIFO you can use FIFO LIFO calculators.

 

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Conclusion

While making a comparison between FIFO and LIFO, we can conclude FIFO is the excellent option as corporations characteristically use their eldest inventory first in their manufacturing. Moreover, GAAP and IFRS allow their use. Now how to calculate FIFO ending inventory at the end of the year? You can multiply the Cost of older inventory by the amount of inventory sold.

 

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