Comparison chart

FIFO LIFO
Stands for First in, first out Last in, first out
Unsold Unsold inventory comprises goods Unsold inventory comprises the earliest
inventory acquired most recently. acquired goods.
There are no GAAP or IFRS
IFRS does not allow using LIFO for
Restrictions restrictions for using FIFO; both allow
accounting.
this accounting method to be used.
If costs are increasing, the items If costs are increasing, then recently
acquired first were cheaper. This acquired items are more expensive. This
Effect of decreases the cost of goods sold increases the cost of goods sold (COGS)
Inflation (COGS) under FIFO and increases under LIFO and decreases the net profit.
profit. The income tax is larger. Value The income tax is smaller. Value of
of unsold inventory is also higher. unsold inventory is lower.
Converse to the inflation scenario,
accounting profit (and therefore tax) is Using LIFO for a deflationary period
Effect of
lower using FIFO in a deflationary results in both accounting profit and
Deflation
period. Value of unsold inventory, is value of unsold inventory being higher.
lower.
Since newest items are sold first, the
Since oldest items are sold first, the
Record oldest items may remain in the inventory
number of records to be maintained
keeping for many years. This increases the
decreases.
number of records to be maintained.
Only the newest items remain in the Goods from number of years ago may
inventory and the cost is more recent. remain in the inventory. Selling them
Fluctuations
Hence, there is no unusual increase or may result in reporting unusual increase
decrease in cost of goods sold. or decrease in cost of goods.

Differentiate between the FIFO, LIFO and Average Cost inventory valuation methods

Key Points

Without inflation all three inventory valuation methods would produce the same
results. However, prices do tend to rise over the years, and the company's method
costing method affects the valuation ratios.
The FIFO method assumes that the first unit in inventory is the first until sold. FIFO
gives a more accurate value for ending inventory on the balance sheet. On the other
hand, FIFO increases net income and increased net income can increase taxes owed.
The LIFO method assumes the last item entering inventory is the first sold. During
periods of inflation LIFO shows ending inventory on the balance sheet much lower
than what the inventory is truly worth at current prices, this means lower net income
due to a higher cost of goods sold.
The average cost method takes a weighted average of all units available for sale during
the accounting period and then uses that average cost to determine the value of COGS
and ending inventory.