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LIFO and FIFO (1 Viewer)
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obliviousninja
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LIFO would allow the company to expense recent 'inflated' costs for older pre-inflation costs, thereby lowering their taxes.
Illegal in Australia - The inventory remaining in ending inventory at the end of the accounting period does not reflect the current cost of inventory, so it is not an accurate valuation.
Illegal in Australia - The inventory remaining in ending inventory at the end of the accounting period does not reflect the current cost of inventory, so it is not an accurate valuation.
anomalousdecay
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I have only ever been introduced to LIFO and FIFO in Computing.
LIFO is like a stack. You put things on top of each other, and you take them out from the top. So the last item to go in, is the first item to come out.
FIFO is like a queue. Things come in and they go out in the order that they came in. So the first thing in is the first thing out.
A FIFO system would be ideal as a checklist where things are put in and they must be completed by a deadline. So I would say a disadvantage of using LIFO compared to using FIFO would be that with LIFO, some things that are left aside and are left incomplete for a long time, which may lead to issues down the track.
LIFO is like a stack. You put things on top of each other, and you take them out from the top. So the last item to go in, is the first item to come out.
FIFO is like a queue. Things come in and they go out in the order that they came in. So the first thing in is the first thing out.
A FIFO system would be ideal as a checklist where things are put in and they must be completed by a deadline. So I would say a disadvantage of using LIFO compared to using FIFO would be that with LIFO, some things that are left aside and are left incomplete for a long time, which may lead to issues down the track.
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LIFO allows consumers to have the most newest product which will satisfy them.
However, in regards to balance sheets, LIFO is illegal in Australia because it makes the gross profit appear less -> making COGs appear higher (therefore the value of CLOSING stock being less), meaning lower tax
However, in regards to balance sheets, LIFO is illegal in Australia because it makes the gross profit appear less -> making COGs appear higher (therefore the value of CLOSING stock being less), meaning lower tax
gummibear0731
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can you explain this in more depth..? i dont really understand it and my teacher doesnt know about it
seremify007
Junior Member
Old thread but basically LIFO and FIFO are different inventory valuation methods.
Basically assume you are a retailer selling a homogeneous product (widgets). Typically prices change over time, and usually with inflation, they increase. Here's a simplified example but should illustrate the point.
e.g. On 1 January 2015, widgets are sold by a distributor for $10 each. On 1 January 2016, the same widgets now sell for $15 each.
If you sold one of those widgets on 2 January 2016 for $20, what should your gross profit (revenue less cost of goods sold) be? Under LIFO, it would only be $5 ($20-$15) whereas under FIFO it would be $10 ($20-$10). Lower profit means lower tax.
(side note; I wouldn't go as far to say it's outright illegal to use LIFO since in some cases you can but need to be able to justify it through other considerations; e.g. Parcels of securities for CGT).
Basically assume you are a retailer selling a homogeneous product (widgets). Typically prices change over time, and usually with inflation, they increase. Here's a simplified example but should illustrate the point.
e.g. On 1 January 2015, widgets are sold by a distributor for $10 each. On 1 January 2016, the same widgets now sell for $15 each.
If you sold one of those widgets on 2 January 2016 for $20, what should your gross profit (revenue less cost of goods sold) be? Under LIFO, it would only be $5 ($20-$15) whereas under FIFO it would be $10 ($20-$10). Lower profit means lower tax.
(side note; I wouldn't go as far to say it's outright illegal to use LIFO since in some cases you can but need to be able to justify it through other considerations; e.g. Parcels of securities for CGT).