FIFO and LIFO during inflation - The type of accounting method used for inventory can play a major factor in a business FIFO(First In First Out and

FIFO and LIFO during inflation - The type of accounting...

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The type of accounting method used for inventory can play a major factor in a business. FIFO (First In First Out) and LIFO (Last In First Out) are the two most common methods used. FIFO assumes the oldest inventory is used first whereas LIFO assumes the newest inventory is used first. Typically prices increase over time. If this is the case with a businesses inventory than the accounting methods used to record inventory can affect the financial statements. With FIFO the cost of goods sold is lower because the lower priced inventory is used. This method records the higher priced inventory on the balance sheet, making it stronger. When using LIFO cost of goods sold tends to be higher because the newer, higher priced inventory is being used in the calculation. This also means the remaining inventory is recorded at the lower cost of the older inventory on the balance sheet, weakening it. (Haden, 2012) Using LIFO typically means a

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