Lifo and Fifo

To whom it may concern:

I'm writing you this memo after learning that a friend has suggested you change your LIFO to FIFO for this year. I understand that your reason for wanting to change is that you are negotiating to get an increased line of credit at the bank and that they will use the balance sheet as part of the review. However, I feel that as the person in charge of your accounting, I must explain the pros and cons of doing this. Can I do it? YES!. Is it the best solution for your situation? Not necessarily. I personally wouldn't do it but let me first explain what FIFO and LIFO mean. FIFO and LIFO are accounting methods used for determining the value of unsold inventory as well as the cost of goods sold. FIFO stands for First In, First Out, which means the goods that are unsold are the ones that were most recently added to the inventory. LIFO is Last In, First Out, which means goods most recently added to the inventory are sold first so the unsold goods are ones that were added to the inventory the earliest. With LIFO newest items are sold first, the oldest items may remain in the inventory for many years. This helps us keep a better record of what's in our inventory. With FIFO, oldest items are sold first, meaning that the number of records to be maintain decreases. The most important reason why I wouldn't chnge to FIFO for this year is because although it's helping you in securing an increase for your credit line, you will end up paying much more in taxes when it's time to file. Is it worth paying more tax in order to secure a credit line that needs to be payed back sooner or later? I'll let you be the judge of that.