FIFO vs LIFO: Inventory Valuation

Basic of Distinction	FIFO	LIFO
1. Basic Assumption	Goods received first are issued first.	Goods received last are issued first.
2. Cost of goods sold	Cost of goods sold represents cost of earlier purchases.	Cost of goods sold represents cost of recent purchases.
3. Ending Inventory	Ending inventory represents cost of recent purchases	Ending inventory represents cost of earlier purchases.
4. In case of rising prices	Higher income is reported since old costs (which are lower that current costs) are matched with current revenue. As a result, income tax liability is increased.	Lower income is reported since current costs (which are higher that the old costs) are matched with current revenue. As a result, income tax liability is reduced.
5. Distortion in Balance Sheet	Balance Sheet shows the ending inventory at a value neared the current market price.	Balance Sheet is distorted because ending inventory is understated at old costs.

Q. Distinguish between the FIFO and LIFO methods of inventory valuation.