F.I.F.O. vs L.I.F.O.

Identify the differences between F.I.F.O., L.I.F.O., and the average-cost method of inventory valuation. Be sure to include the effects of each method on cost of goods sold and net income in your answer. Also discuss the differences between the physical movement of goods and cost flow assumptions. Your answer should illustrate understanding of the three major inventory valuation methods, and the relationship between physical inventory flow and cost flow assumptions. Respond to at least two of your classmates’ posts.

Most companies do not keep track of the cost of each item sold, but make assumptions about which units are sold (Kimmel, 2012). The assumptions are known as cost flow assumptions. First-in, first-out (FIFO); last-in, last-out (LIFO); and average costs are the methods used in cash flow assumptions.
Using the FIFO method, cost of the ending inventory is determined “by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed” (Kimmel, 2012). Therefore, the first goods that are bought are the first goods to be sold. With FIFO, the ending inventory reflects the prices of the most recent units purchased. Using the LIFO method, the cost of the most recent goods bought are the first to be recognized to determine cost of goods sold. The ending inventory reflects the prices of the oldest units purchased. Unlike FIFO, the LIFO method works forward until all units have been costed.
Although the cost of goods available for sale should be the same with all cost flow methods, the ending inventories and costs of goods sold varies. During inflation, a higher net income is seen with FIFO. The impact is due to the lower unit costs of the first units bought are matched against revenues (Kimmel, 2012). Therefore, when prices fall FIFO would report the lowest net income. The same effects on cost of goods sold and net income with the LIFO method are opposite that of the FIFO method.

Reference:
Kimmel, Paul D. Financial Accounting: Tools for Business Decision Making, 7th Edition. John
Wiley & Sons, 2012. VitalBook file. Bookshelf.