Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 90

LIFO versus FIFO — matching and balance sheet impact Proponents of the LIFO inventory cost-flow assumption argue that this costing method is superior to the alternatives because it results in better matching of revenue and expense.

Required:

a. Explain why “better matching” occurs with LIFO.

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b. What is the impact on the carrying value of inventory in the balance sheet when LIFO rather than FIFO is used during periods of inflation?

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LIFO versus FIFO – Impact on Balance sheet

FIFO: It stands for first-in, first-out. This explains that the oldest stock items are sold first then the recent purchased or produced stocks.

LIFO: It stands for last-in, first-out. This explains that the most recently purchased or produced stock items are sold first then the oldest one.