Why is LIFO inventory is smaller than FIFO inventory in rising prices periods?

CFA Level I
#1

Hi guys, I am not sure why is LIFO inventory is smaller than FIFO inventory in rising prices periods? Can I have some illustrations to make clear this idea? Thanks a million!

#2

Think about what LIFO (Last In,First Out) actually means… When prices are rising,you are allocating expensive goods to cost of sales.The remaining “cheap” goods remain in inventory at year-end,so the ending inventory balance under LIFO is small.The opposite is true for FIFO inventories when prices are rising and the inventory quantities are stable or increasing.

#3

Obviously the Quantities in the Inventories are the same no matter if Lifo or Fifo So it comes to a method to evaluate the price/value of inventory Fifo - when you sell something the COGS associated with that sale is smaller since you bought that stuff at a lower cost, let;s say 2-3 years ago and that means that in inventory you have the units you purchased at a higher price Just think of oil prices and make up an example of valuing inventory

#4

I see… Thanks alot guys.