Reflection of LIFO & FIFO Inventory Methods

Reflection of LIFO & FIFO Inventory Methods

Introduction

There are different types of inventory control or inventory management systems that are prevailing in the world nowadays. These include First in First out (FIFO), Last in First out (LIFO) & Weighted Average Method or Average Cost Method (AVCO). We will only discuss two of them those are FIFO and LIFO inventory control method. Before moving on the effects of these methods we will discuss the basics of these systems (Brandeau, et. al., 2004).

FIFO or First in First out is the method in which the inventory is controlled through a mechanism in which the goods we have purchased first will be sold first. When at the year end or period end the calculation for the inventory is done the inventory which is left is calculated taking the price of the consignments which has been delivered in last. To be more concise we can say that an ascending order is followed for inventory evaluation (Dickie, 2006).

LIFO or Last in First out is the method in which the inventory is controlled through a mechanism in which the goods purchased in last are sold first. When at the year end the inventory is calculated goods that are purchased initially are considered to be in the stock rather than those which are purchased in last. In other words we can say that a descending order is followed in sales of goods (Brandeau, et. al., 2004).

Here arises a question that why there are different inventory management methods that prevail in the world and which methods is the best to evaluate the inventory? Answer to this question is that the companies always want to give a true and fair view of their financial position to its customers and inventory control and evaluation is an important ...