Lifo_vs._Fifo

Lifo vs. Fifo University of Phoenix QRB/501 Vladimir Crk July 26, 2010 Some companies may present their financial statements utilizing the last in, first out (LIFO) valuation technique or the first in, first out (FIFO) method. Whichever they prefer, it is imperative that they have the ability to understand both methods. This paper will discuss a brief overview of both and explain their advantages and disadvantages. Since the early 70's, there has been an increase in the utilization of the last in, first out (LIFO) method. We can ask the question as to why this style exists and it can be answered best by managers of both large and small businesses. In times of raising prices and cost of goods,, erroneous profits in inventory may be from using and inventory valuation method other than last in, first out (LIFO). These so called profits are a result of improved reported earnings. These profits are taxed and a company's net cash flow is reduced. Distinction Between LIFO and FIFO LIFO. This method of inventory costing uses both unit-base and cost-base methods of inventory valuation, using the latest unit acquisition cost that is matched with a company's current sales revenue. Therefore the order of cost outflow viewed is the inverse of the order of cost inflow. The inventory's remaining units are costed at the oldest unit costs available; the units in cost of sales are costed at the most recent unit costs available. FIFO. The costing method utilizing LIFO is differentiates with the first in, first out (FIFO) inventory method. This method assumes that the cost of items sold in a period are indicative of the oldest cost in inventory just before sale. Consequently, the remaining inventory valued at FIFO more closely represents current or replacement cost. FIFO deals with the physical movement of goods. Companies usually use the oldest items in inventory first so they can constantly roll the stock and prevent deterioration or running out of product. In an inflationary environment, the FIFO method results in "inventory profits"--these are profits that will rise just because inventory is being held and doing so fails to provide the best cost for each product. Comparability The financial statements of a company using the LIFO approach as opposed to FIFO generally reflect: * Conservative profits, because LIFO buffers the effects of inflation. * Better matching of current costs with current revenues. * Lower liquidity, that is, a lower current ratio. * Lower equity position, that is, a higher debt-to-worth ratio. Conclusion The LIFO inventory method have a serious impact on business financial reports. Therefore,. this method must be recognized and the adjustments made to applicable financial reports in order to report valid information. The FIFO method is a difficult technique and will require more investigation in order to be properly understood. References Gibson, S. C. (2002, October). Lifo vs. Fifo: A Return to the Basics. RMA Journal, (), .