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FIFO and LIFO Methods
are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks.
stands for first-in, first-out
, meaning that the oldest inventory items are recorded as sold first but do not necessarily mean that the exact oldest physical object has been tracked and sold; this is just an inventory technique.
stands for last-in, first-out
, meaning that the most recently produced items are recorded as sold first. Since the 1970s, U.S. companies have tended to use LIFO, which reduces their income taxes in times of inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
. LIFO is only used in Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
and the U.S.
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve
. This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method.
- Cost of goods sold
Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...
- Income statement
Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
- Moving average cost
- Specific identification
Specific identification is a method of finding out ending inventory cost.It requires a detailed physical count, so that the company knows exactly how many of each goods brought on specific dates remained at year end inventory...
- Weighted average cost