FIFO vs LIFO: Differences and Examples

The stack data structure has several applications, including expression evaluation, memory management, and function calls. FIFO leverages a queue-type data structure wherein the oldest element stays at the front, awaiting preferential processing. Think of FIFO as ‘first come, first served’ for programming elements, like a checkout queue at the supermarket where the first person in line is served first.

On the other hand, FIFO stands for ‘first in, first out’ and uses a queue data structure. In a FIFO data structure, the first element added to the queue is processed first. However, if the units had been purchased on May 15 and May 27 for the same amount, there would be no impact on financial statements. The cost of beginning and ending inventory is an important factor in COGS.

And companies are required by law to state which accounting method they used in their published financials. FIFO can be a better indicator of the value for ending inventory because the older items have been used up while the most recently acquired items reflect current market prices. The fundamental difference between FIFO and LIFO lies in the order in which inventory is considered sold. FIFO prioritizes the sale of older inventory, aligning more closely with the actual physical flow of goods in most businesses.

Why Use FIFO?

FIFO stands for “first in, first out” and assumes the first items entered into your inventory are the first ones you sell. LIFO, also known as “last in, first out,” assumes the most recent items entered into your inventory will be the ones to sell first. The inventory valuation method you choose will depend on your tax situation, inventory flow and record keeping requirements. When all inventory items are sold, the total cost of goods sold is the same, regardless of the valuation method you choose in a particular accounting period.

A $40 profit differential wouldn’t make a significant difference to your bottom line. From the perspective of income tax, the dealership can consider either one of the cars as a sold asset. If it accounts for the car purchased in the fall using LIFO technique, the taxable profit on this sale would be $3,000. However, if it considers the car bought in spring, the taxable profit for the same would be $6,000.

Restrictions on Changing Inventory Methods

This is achieved by keeping the oldest element at the beginning of the queue and allowing swift access. They can perform entity addition and removal processes in constant time (O(1)). Some programming languages provide in-built queue support; for instance, the ‘queue’ interface in the Java library and the ‘queue’ templated class in the C++ Standard Template Library.

Inventory Valuation

Inventory refers to purchased goods with the intention of reselling, or produced goods (including labor, material & manufacturing overhead costs). No, the LIFO inventory method is not permitted under International Financial Reporting Standards (IFRS). Both the LIFO and FIFO methods are permitted under Generally Accepted Accounting Principles (GAAP).

FIFO vs LIFO approach in Programming

As a result, the company would record lower profits or net income for the period. However, the reduced profit or earnings means the company would benefit from a lower tax liability. The average cost method takes the weighted average of all units available for sale during the accounting period and then uses that average cost to determine the value of COGS and ending inventory. In our bakery example, the average cost for inventory would be $1.125 per unit, calculated as [(200 x $1) + (200 x $1.25)]/400.

POS sales reports can help you make informed inventory decisions and compare sales from different store locations. By using LIFO, a company would appear to be making less money than it actually did and, therefore, have to report less in taxes. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. Regardless of the price you paid for your wire, you chose to keep your selling price stable at $7 per spool of wire.

LIFO inventory values

There are usually more inventory layers to track in a LIFO system, since the oldest layers can potentially remain in the system for years. There are usually fewer inventory layers to track in a FIFO system, since the oldest layers are continually used up. There are no GAAP or IFRS restrictions on the use of FIFO in reporting financial results.

The formula to calculate the earnings per share (EPS) metric, on a fully diluted basis, is as follows. Our partners cannot pay us to guarantee favorable reviews of their products or services. Companies outside of the United States that use International Financial Reporting Standards (IFRS) are not permitted to use the LIFO method. Companies within the U.S. have greater flexibility on the method they may choose and can opt for either LIFO or FIFO. Amanda Bellucco-Chatham is an editor, writer, and fact-checker with years of experience researching personal finance topics. Specialties include general financial planning, career development, lending, retirement, tax preparation, and credit.

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