Question

which method is better FIFO or LIFO? and why​

Answer 1

Explanation:

First, remember this: Higher-cost inventory = lower taxes. ... Since prices usually increase, most businesses prefer to use LIFO costing. If you want a more accurate cost, FIFO is better, because it assumes that older less-costly items are most usually sold first.

Answer 2

Explanation:

First in, first out Last in, first out

Unsold inventory Unsold inventory comprises goods acquired most recently. Unsold inventory comprises the earliest acquired goods.

Restrictions There are no GAAP or IFRS restrictions for using FIFO; both allow this accounting method to be used. IFRS does not allow using LIFO for accounting.

Effect of Inflation If costs are increasing, the items acquired first were cheaper. This decreases the cost of goods sold (COGS) under FIFO and increases profit. The income tax is larger. Value of unsold inventory is also higher. If costs are increasing, then recently acquired items are more expensive. This increases the cost of goods sold (COGS) under LIFO and decreases the net profit. The income tax is smaller. Value of unsold inventory is lower.

Effect of Deflation Converse to the inflation scenario, accounting profit (and therefore tax) is lower using FIFO in a deflationary period. Value of unsold inventory, is lower. Using LIFO for a deflationary period results in both accounting profit and value of unsold inventory being higher.

Record keeping Since oldest items are sold first, the number of records to be maintained decreases. Since newest items are sold first, the oldest items may remain in the inventory for many years. This increases the number of records to be maintained.

Fluctuations Only the newest items remain in the inventory and the cost is more recent. Hence, there is no unusual increase or decrease in cost of goods sold. Goods from number of years ago may remain in the inventory. Selling them may result in reporting unusual increase or decrease in cost of goods