chapter 9 FIFO and LIFO - Advantages of FIFO Corresponds with current flow of goods Ending inventory reflects current purchase price Disadvantages of

chapter 9 FIFO and LIFO - Advantages of FIFO Corresponds...

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Advantages of FIFO:Corresponds with current flow of goodsEnding inventory reflects current purchase priceDisadvantages of FIFO:Matching old costs with current revenuesIn an inflationary period, prices are constantly going up so our net income is lower and our taxes are higherAdvantages of LIFOMatching current costs with current revenues (newest purchases matched with newest sales)Ending inventory is the old stuff at old cost that has no connection with current replacement valueGenerallyyou pay less taxes, but only if prices are increasingDisadvantages of LIFO:Costing system goes in opposite direction of system flowLIFO liquidation can result in greatly increased tax payments when inventory levels declineInflationary period: LIFO is less taxesDeflationary period: FIFO is less taxesConstant prices: doesn’t matter, exactly the same-Many companies use LIFO for tax and external reporting then use FIFO for internal reporting

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