Question

Discuss the differences between the FIFO and LIFO inventory systems and how these two inventory costing systems are similar or different from the actual physical movement of the goods in inventory.

Answer 1

The U.S. generally accepted accounting principles (GAAP) allow businesses to use one of several inventory accounting methods: first-in, first-out (FIFO), last-in, first-out (LIFO), and average cost.

the FIFO priniciple assumes that the oldest inventory is sold first.consider this example

a bakery produces 150 loaves of bread on Monday at a cost of $1 each, and 200 more on Tuesday at $1.25 each. FIFO states that if the bakery sold 250 loaves on Wednesday, the COGS is $1 per loaf for the first 200 and $1.25 for the remaining 50 loaves. The remaing loaves are costed at $1.25 and allocated to ending inventory

while LIFO principles aasumes that the recently purchased inventory is sold first. for the above example

For the 250 loaves sold on Wednesday, the same bakery would assign $1.25 per loaf for the first 200 loaves and $1 to remaining 50 loaves, while the remaining lloaves are costed at $1 and allocated to ending inventory

physical movements of the goods

Since LIFO uses the most recently acquired inventory to value COGS, the leftover inventory might be extremely old or obsolete. As a result, LIFO doesn't provide an accurate or up-to-date value of inventory because the valuation is much lower than inventory items at today's prices. LIFO is not realistic for perishable products selling companies.consider a company sells seafood products use LIFO principles then the olde products become idle and this leads to damages.FIFO can be a better indicator of the value for ending inventory because the older items have been used up while the most recently acquired items reflect current market prices.for the sea food products selling company,if they uses FIFO principles there will be no idle products and damages will reduced.