What is the primary difference between FIFO and LIFO inventory valuation methods
Practice Questions
Q1
What is the primary difference between FIFO and LIFO inventory valuation methods?
Cost flow assumption
Tax implications
Impact on cash flow
Reporting requirements
Questions & Step-by-Step Solutions
What is the primary difference between FIFO and LIFO inventory valuation methods?
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.
