PRESENTED BY -: KAMYA

SARASWAT
COURSE -: BBA(F.B0 IIND SEM 1ST
YEAR
ROLL NO -:
Exploring LIFO
and FIFO:
Inventory
Valuation
This presentation provides an introduction to the two
primary inventory valuation methods: Last-In, First-Out

Methods
(LIFO) and First-In, First-Out (FIFO). We'll dive into the
fundamentals of each approach and examine their impact on
financial reporting.
Understanding Inventory
Valuation Methods
LIFO FIFO Comparison

The Last-In, First-Out The First-In, First-Out The choice between

(LIFO) method assumes (FIFO) method assumes LIFO and FIFO can
that the most recently that the earliest significantly impact a
acquired items are sold acquired items are sold company's reported
first. This results in the first. This results in the profits and inventory
oldest costs being most recent costs being valuation on the
assigned to the cost of assigned to the cost of balance sheet.
goods sold. goods sold.
Calculating Cost of Goods Sold
using LIFO

Step 1 1
Identify the most recent
purchases and assign their
costs to the units sold. 2 Step 2
Move backwards through the
inventory records, assigning
Step 3 3 the next most recent costs to
Continue this process until all the remaining units sold.
units sold have been accounted
for.
Calculating Cost of Goods
Sold using FIFO
1 Step 1
Identify the earliest purchases and assign their costs to the
units sold.

2 Step 2
Move forward through the inventory records, assigning the
next earliest costs to the remaining units sold.

3 Step 3
Continue this process until all units sold have been accounted
for.
Advantages and
Disadvantages of LIFO
1 Advantages
LIFO can help mitigate the
impact of rising costs on
reported profits, resulting in
a lower taxable income in
periods of inflation.
2 Disadvantages
LIFO can lead to a lower
inventory value on the
balance sheet, as the most
recent and potentially higher-
cost items are not reflected.

3 Caution
LIFO is not permitted for tax reporting in many countries, so
companies must maintain dual inventory records.
Advantages and
Disadvantages of FIFO
1 Advantages 2 Disadvantages
FIFO results in a more FIFO can result in higher
accurate representation of reported profits during
current inventory costs on periods of rising costs,
the balance sheet, as the potentially leading to higher
most recent purchases are tax liabilities.
reflected.
3 Simplicity
FIFO is generally simpler to implement and understand than LIFO,
making it a more common choice for many businesses.
Impact of LIFO and FIFO on
Financial Statements

Profitability Inventory Cash Flow Taxes

Valuation
LIFO can result in The choice LIFO can help
lower reported LIFO generally between LIFO reduce a
profits, while results in a lower and FIFO can company's
FIFO can lead to inventory value impact a taxable income
higher reported on the balance company's during periods of
profits, sheet, while FIFO reported cash inflation, while
particularly in reflects more flow, as it affects FIFO may result
times of rising current inventory the cost of goods in higher tax
costs. costs. sold. liabilities.
Choosing the Right Inventory
Valuation Method
Business Needs
Consider your company's specific
requirements, such as the need to
manage cash flow or minimize tax
liabilities.
Regulatory
Environment
Understand the tax and reporting
requirements in your jurisdiction, as
some countries may restrict the use
of certain inventory valuation
methods.
Industry Trends
Examine the practices of your
competitors and industry peers to
ensure your choice aligns with
market standards.
Consistency
Once you've chosen a method,
maintain consistency in its
application to ensure the
comparability of your financial
statements over time.