Inventory Valuation

LIFO FIFO Difference

BASIS FOR Page | 1

LIFO FIFO
COMPARISON

Meaning LIFO is an inventory valuation FIFO is an inventory valuation

technique, in which the last technique, in which the first
received stock of goods is issued received stock of goods is issued
first. first.

Stock in hand Represents the oldest stock Represents the latest stock

Current market Shown by the cost of goods sold Shown by the cost of unsold stock
price

Restrictions IFRS, does not recommend the use No such restriction

of LIFO for valuing the inventory
in accounting.

Inflation Income tax shows minimum In inflationary condition, income

amount, when there is inflation in tax shows a higher amount.
the economy.

Deflation In case of deflation, larger amount Reduced income tax will be shown
of income tax is shown. in deflationary conditions.

What is the difference between FIFO and Weighted Average?

FIFO vs Weighted Average

FIFO is an inventory valuation method Weighted average method uses the average
where the first purchased goods are sold inventory levels to calculate inventory value.
first.
FIFO is the most commonly used inventory Usage of weighted average method is less
valuation method. compared to FIFO.
Inventory will be issued from the oldest Inventory will be averaged out to arrive at a
available batch. price.

Fast In First Out (FIFO) Method, Its Advantages And Disadvantages

Advantages & Disadvantages of FIFO

Advantages Of FIFO
Followings are the advantages of FIFO method.
1. FIFO method is easy to understand and operate.

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 2. FIFO method is useful where transactions are not large, and prices of materials are
falling.
3. FIFO method is suitable for bulky materials with high unit prices.
4. FIFO method helps to avoid deterioration and obsolescence.
5. Value of closing stock of materials will reflect the current market price.
Disadvantages Of FIFO Page | 2
Some disadvantages of FIFO method are as follows.
1. FIFO method is improper if many lots are purchased during the period at different
prices.
2. The objective of matching current costs with current revenues can not be achieved
under FIFO method.
3. If the prices of materials are rising rapidly, the current production cost may be
understated.
4. FIFO method overstates profit especially in inflation.

Last In First Out (LIFO) Method, Its Advantages And Disadvantages

Last-In-First-Out (LIFO) method follows the principle that the last items of materials
purchased are issued at first. The valuation of the materials issued is made according to the
latest purchase price of materials. The closing stocks of materials are valued always on the
earliest prices of materials. In case of a rising price, LIFO method is suitable because material
is issued at current market price.

Advantages Of LIFO Method: The main advantages of LIFO method are as follows

1. LIFO method is appropriate for matching cost and revenue.

2. LIFO method is simple to operate and easy to understand.
3. LIFO method facilitates complete recovery of material cost.
4. LIFO method is most suitable when prices are rising.

Disadvantages Of LIFO Method: The main disadvantages of LIFO method are as follows

1. Inventory valuation does not reflect the current prices and therefore are useless in the
context of current conditions.
2. Due to variation of prices, comparison of cost of similar job is not possible.
3. Calculations become complicated and cumbersome when rates of receipts are highly
fluctuating.
4. LIFO involves considerable clerical work.

weighted average method, Its Advantages and Disadvantages

Advantage of weighted average costing method are as under:

 The weighted average method minimizes the effect of unusual high and-low material
prices.
 The weighted average method is practical and suitable for charging cost of material
used to production.
 It is useful for management in analyzing of operating results.

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  This method is simple to apply if receipts of material are not numerous.

Disadvantages of weighted Average Method

 The main disadvantages of weighted average costing method are as under:

 Materials used may not be charged to production at the current price.
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 The cost charged to production are not the actual prices.
 If the receipts are numerous, many calculations are required.

Weighted Average vs. FIFO vs. LIFO: An Overview

At the end of every monthly and yearly period, it’s important for store owners to conduct a
thorough physical inventory count to determine the number of inventory items presently on
hand. And when it comes to accounting for inventory, businesses may use the following three
chief methodologies:

Each of these disciplines relies on a different method of calculating both the inventory and
cost of goods sold, and each system is appropriate for different situations.

KEY TAKEAWAYS

The weighted average method is most commonly employed when inventory items are so
intertwined that it becomes difficult to assign a specific cost to an individual unit.

The FIFO accounting method relies on a cost flow assumption that removes costs from the
inventory account when an item in someone’s inventory has been purchased at varying costs,
over time.

The LIFO accounting method assumes that the latest items bought are the first items to be
sold.

Weighted Average

The weighted average method, which is mainly utilized to assign the average cost of
production to a given product, is most commonly employed when inventory items are so
intertwined that it becomes difficult to assign a specific cost to an individual unit. This is
frequently the case when the inventory items in question are identical to one another.
Furthermore, this method assumes a store sells all of its inventories simultaneously.

To use the weighted average model, one divides the cost of the goods that are available for
sale by the number of those units still on the shelf. This calculation yields the weighted
average cost per unit—a figure that can then be used to assign a cost to both ending inventory
and the cost of goods sold.

While the weighted average method is a generally accepted accounting principle, this system
doesn’t have the sophistication needed to track FIFO and LIFO inventories.

FIFO

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The FIFO accounting method relies on a cost flow assumption that removes costs from the
inventory account when an item in someone’s inventory has been purchased at varying costs,
over time. In other words, under FIFO, the oldest cost of an item in an inventory will be
removed first when one of those items is sold. This oldest cost will then be reported on the
income statement as part of the cost of goods sold.
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LIFO

The LIFO accounting method assumes that the latest items bought are the first items to be
sold. With this accounting technique, the costs of the oldest products will be reported as
inventory. It should be understood that, although LIFO matches the most recent costs with
sales on the income statement, the flow of costs does not necessarily have to match the flow
of the physical units.

Generally speaking, FIFO is preferable in times of rising prices, so that the costs recorded are
low, and income is higher. Contrarily, LIFO is preferable in economic climates when tax
rates are high because the costs assigned will be higher and income will be lower.