What is the primary difference between FIFO and LIFO inventory valuation methods?
Practice Questions
1 question
Q1
What is the primary difference between FIFO and LIFO inventory valuation methods?
Cost flow assumption
Tax implications
Impact on cash flow
Reporting requirements
FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) differ in their cost flow assumptions for inventory valuation.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the primary difference between FIFO and LIFO inventory valuation methods?
Solution: FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) differ in their cost flow assumptions for inventory valuation.
Steps: 5
Step 1: Understand that FIFO stands for First-In, First-Out. This means that the oldest inventory items are sold first.
Step 2: Understand that LIFO stands for Last-In, First-Out. This means that the newest inventory items are sold first.
Step 3: Recognize that FIFO assumes the cost of older inventory is used to calculate the cost of goods sold, which can lead to lower costs during inflation.
Step 4: Recognize that LIFO assumes the cost of newer inventory is used to calculate the cost of goods sold, which can lead to higher costs during inflation.
Step 5: Conclude that the primary difference is the order in which inventory costs are recognized when items are sold.
