Free Essays

Financial Accounting

The FIFO method will consider goods coming in first to the issued by the company ahead of the last goods coming in case of sale. The result is therefore felt in the inventory of the company where the new or last purchases will form part of the ending inventory. This method or practice will therefore cause a higher value of ending inventory and lower cost of goods sold for income computation purposes, during inflationary times or when prices of commodities in the market are rising.

If the situation is reversed, that is, during deflation times, there will be a lower value of ending inventory and higher cost of goods when compared with the effect of using FIFO (Meigs and Meigs, 1995). The LIFO on the other hand, is the opposite of FIFO since it would be the last purchases or most recent acquisitions that will have to be issued first when the company makes a sale.

During inflationary times, the value of the ending inventory of the company which uses the LIFO method will be lower as compared to the use of FIFO. On the other hand, the cost of goods sold will be higher than when FIFO is used. If the situation is reversed, that is, during deflation times, there will be a higher value of ending inventory and lower cost of goods when compared with the effect of using FIFO. As to when do companies make use of each of the two methods will depend upon the purpose of the company.

If the company wants to have a higher income inflation times, it will use the FIFO method as higher inventory will cause the company to have higher income. But during deflation, the company would use the LIFO to make it appear that it has higher income (Meigs and Meigs, 1995). If the company wants to reduce the income to minimize taxes, it will just make LIFO during inflationary times and FIFO during deflation.