FIFO (First in first out) refers to the inventory valuation method in which
oldest batch of materials are issued first and new batch (latest purchased)
remain on warehouse. Conversely, LIFO (Last in first out) is a method in
which recently acquired materials, inventory or other goods are issued or
sold first and older batch of materials remain in the warehouse or
stock.
Difference Between FIFO And LIFO
The major dissimilarities or differences between FIFO and LIFO methods can
be described as follows:
1. Introduction
FIFO: It is a method of inventory accounting in which oldest stocks
are sold, used or issued first.
LIFO: In this approach, most recently received stocks are issued or
sold first.
2. Simple/Complex
FIFO: This approach is simple and easy to understand. It does not
require more paper work.
LIFO: It is more complicated and difficult to operate as compared to
FIFO. It requires more clerical and paper work.
3. Realistic Or Not
FIFO: This method is more realistic than LIFO because value of stock
is determined on the basis of current market price. So, it gives more
accurate result.
LIFO: In this method, value of stock is computed on the basis of
older price of unsold stock. So, it may not give realistic result.
4. Suitability
FIFO: This approach is suitable for the products having shorter life
such as food and beverages.
LIFO: It is suitable for the items having longer life span.
5. Popularity
FIFO: It is popular and widely used method of inventory
valuation
LIFO: It is least preferred approach of inventory accounting.
FIFO: In inflation, it shows higher profit because cost of goods
sold will be deceased.
LIFO: In inflationary situation, cost of goods sold will be
increased that lowers the profit as well as tax value.
7. Impact Of Deflation
FIFO: In deflationary condition, cost of goods sold increases that
leads to decrease in profit and tax value.
LIFO: In deflation, cost of goods sold decreases that shows high
profit and tax value.
8. Regularity Restriction
FIFO: It is approved by GAAP and not restricted by IFRS
(International financial reporting standards).
LIFO: It is not recommended by IFRS
Also Read
Brief Comparison Between First In First Out (FIFO) And Last In First Out
(LIFO)
- FIFO is simple and realistic approach. But LIFO is complex and may not
provide realistic result.
- FIFO shows higher profit and LIFO shows less profit in inflationary
condition.
- FIFO shows less profit and LIFO shows higher profit time in deflationary
condition.
- FIFO is suitable for perishable products. But LIFO is not applicable for
such products.
- FIFO is approved by IFRS and LIFO is restricted