Evaluation of FIFO and LIFO

Question 1

Regardless of price changes, how will FIFO and LIFO affect ending inventory and COGS?

Answer 1

LIFO - Earliest costs in Ending Inventory, Latest costs in COGS
FIFO - Latest costs in Ending Inventory, Earliest costs in COGS

Question 2

What is the main reason for using Last In First Out (LIFO) in periods of rising costs?

Answer 2

Tax minimization. Lower net income due to higher COGS

Question 3

What are the attributes of First In First Out (FIFO)?

Answer 3

1. )Most closely approximates actual physical flow of goods for most companies;
2. )Balance sheet valuation of inventory is at more desired current cost;
3. )Matching of revenues and expenses on income statement is not ideal.

Question 4

Does FIFO favor the balance sheet or income statement?

Answer 4

Balance Sheet. It matches revenues with COGS from prior periods (First in First out)

Question 5

What are the attributes of Last In First Out (LIFO)?

Answer 5

1. )Matching of revenues and expenses is significantly improved over FIFO;
2. )Income tax advantages associated with LIFO;
3. )Balance sheet presentation is less than ideal

Question 6

What is a LIFO Liquidation?

Answer 6

Part of the current period COGS represented by the COGS acquired in prior years

Question 7

Why do LIFO Liquidations usually occur?

Answer 7

1. ) Poor Planning

2. ) Lack of Supply

Question 8

List some reasons to avoid Last In First Out (LIFO) liquidation.

Answer 8

1. )Increases taxes;

2. )Does not match current period expenses and revenues