ACC205 Week 3 – Discussion 1
| LIFO vs. FIFO |
The controller of Sagehen Enterprises believes that the company should switch from the LIFO method to the FIFO method. The controller’s bonus is based on the next income. It is the controller’s belief that the switch in inventory methods would increase the net income of the company. What are the differences between the LIFO and FIFO methods?
ACC205 Week 3 – Discussion 1 Answer |
LIFO (Last-In, First-Out) and FIFO (First-In, First-Out) are two methods of inventory valuation and cost of goods sold (COGS) calculation used in accounting. Both methods are used to determine the value of inventory and COGS for financial reporting purposes.
The main difference between the two methods is the order in which inventory is assumed to be sold. Under the LIFO method, the last items to be added to inventory are assumed to be the first ones sold. Under the FIFO method, the first items added to inventory are assumed to be the first ones sold.
In general, the LIFO method results in a higher COGS and a lower gross profit and net income, because the cost of the most recently purchased items is recognized as an expense. The FIFO method, on the other hand, results in a lower COGS and a higher gross profit and net income, because the cost of the older items is recognized as an expense.https://www.purdueglobal.edu/degree-programs/health-sciences/health-wellness-bachelor-degree/
It is important to note that the choice of inventory valuation method can have a significant impact on a company’s financial statements. Therefore, it is important for companies to carefully consider the pros and cons of each method and choose the one that best reflects the nature of their business operations.
