Formula

Comparison Table of FIFO and LIFO

| |FIFO (First in, first out) |LIFO (Last in, first out) |

|Unsold Inventory |Consists of goods acquired most recently. |Consists of the earliest acquired goods. |

|Restrictions |No GAAP or IFRS restrictions |IFRS does not allow using LIFO for accounting |

|IRS regulations require that if a company uses LIFO to measure taxable income, the company also must use LIFO for external financial reporting |

|(http://connect.mcgraw-hill.com/sites/0077328787/student_view0/ebook/chapter8/chbody1/inventory_cost_flow_assumptions.htm)   |

|However, FASB states that a company should choose the method that most clearly reflects their periodic income (FASB 330-30-9). |

|Effect of Inflation |If costs are increasing, the items sold first were|If costs are increasing, then recently sold items are more |

| |cheaper. This decreases the cost of goods sold |expensive. This increases the cost of goods sold and decreases|

| | and increases profit. Thus, the income tax is |the net profit. The income tax is smaller. Value of unsold |

| |larger. Value of unsold inventory is also higher |inventory is lower |

|Effect of Deflation |Is opposite to inflation scenario, accounting |Accounting profit and value of unsold inventory being higher |

| |profit (and therefore tax) is lower. Value of |...