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!
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.
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
I see… Thanks alot guys.