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FIFO vs LIFO

Difference Between FIFO vs LIFO

To determine the value of unsold inventory, transactions like stock repurchase and the cost of goods sold that need to be reported at the end of accounting period, few accounting methods are used which are referred to as FIFO and LIFO.

There are two kinds of accounting methods – FIFO and LIFO. The goods most recently added to the inventory which are unsold are known to be under the method First in First Out i.e. FIFO. And the method in which the goods are most recently added to the inventory is sold first, so the ones that are added to the inventory the earliest are the unsold goods are known as Last In First Out i.e. LIFO.

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First in First out accounting method used is allowed by the GAAP and IFRS and hence is considered to be more popular.

On the other hand, Last in First out is not permitted by the IFRS standard so it is less popular, to be lower in inflationary times, it does, however, allow the inventory valuation.

First in First out, on one hand, is when the goods enter (inventory) and leaves (sold) the inventory as the latest entry from the bottom side of the below inventory boxFirst in First out

FIFO – Good 1 enters first and leaves the inventory first.

Last in First out, on the other hand, is when the good entered first leaves (sold) the inventory box last.

Last in First out

LIFO – Good 4 enters last and leaves the inventory first.

In this FIFO vs LIFO article, we will understand both FIFO and LIFO methods in detail. We will also look at the comparative analysis between them.LIFO – Good 4 enters last and leaves the inventory first.

Without any ado, let’s get started with the head-to-head difference between FIFO vs LIFO first. Then we will talk about each of the methods separately.

Head To Head Comparison Between FIFO vs LIFO (Infographics)

Below are the top 7 differences between FIFO vs LIFO (First in First out vs Last in First out)

FIFO vs LIFO Infographics

Key differences Between FIFO vs LIFO

As you can see there are many differences between FIFO vs LIFO. Let’s look at the top difference are as follows:

  • First in First out is the method used in most businesses. Last in First out, on the other hand, are few businesses where the oldest items are kept in stock.
  • First in First out has fewer inventory layers to track in turn reducing the record-keeping. Last in First out have more inventory layers to track comparatively which increases the record-keeping.
  • First in First out increases the profit and income tax is larger. Last in First out is used to defer the payment of income taxes.
  • First in First out implies the inventory which was added first will be removed first from the stock. Last in First out, on the other hand, implies inventory that was added last to the stock will be removed first.
  • First in First out is given a much higher preference. Last in First out is given a much lower preference on the balance sheet.

FIFO vs LIFO Comparison Table

Below is the Comparison Table Between FIFO vs LIFO. Let’s have a look at them –

The basis of  Comparison  FIFO- First in First out LIFO- Last in First out
1. Meaning First in First out method, goods acquired most recently in the unsold inventory Last in First out method, can be defined as the earliest acquired goods in the unsold inventory
2. Restrictions? No restrictions by GAAP or IFRS. IFRS restricts using the LIFO method.
3. Record Keeping The number of records to be maintained in First in First out decreases. The number of records to be maintained in Last in First out increases.
4. Full Form First in First out. Last in First out.
5. Impact of inflation What decreases the cost of goods sold and increases the net profit is the fact that when costs are increasing, the items acquired later are expensive. What increases the cost of goods sold and decreases the net profit, is the fact that when costs are increasing, the items acquired recently are more expensive.
6. In relation to deflation Similarly, in the deflationary period, the accounting profit is lower under the FIFO. The accounting profit and value of unsold inventory becomes higher, in LIFO for a deflationary period.
7. How much is it preferred? The preference is higher. The preference is lower.

Conclusion

FIFO and LIFO is both important in their own terms. And they both help in reporting the value of inventory. So the question remains can a firm use both as an accounting method?  The answer is yes.

It’s the inflation, because of which arises the need of having more than one accounting method. As if, the cost of material or goods purchase was the same today and last year, the cost of material would be equal to what was purchased last year. So the cost of the inventory added to the stock today will be equal to the stock one year ago. Hence, the value of the inventory whether in LIFO or FIFO will come out to be the same.

That’s why FIFO and LIFO are different methods of inventory accounting for the convenience and benefits offered by both in different conditions.

Recommended Article

This has been a guide to the top difference between FIFO vs LIFO. Here we also discuss the key differences with infographics and comparison table. You may also have a look at the following articles –

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  4. Gross Income vs Net Income
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