FIFO and LIFO is best with which type of products?

Since FIFO and LIFO pertain to the flow of products’ costs, I believe the answer involves the rate of change in the costs of products. In other words,  if the costs of a company’s products are steady, it won’t matter whether a company uses FIFO or LIFO. The reason is that the first or older costs will be similar to the latest or recent costs. On the other hand, if the costs of its products are increasing significantly, there will be significant difference in profits and inventory values between FIFO and LIFO.

In the U.S., accountants often cite LIFO as the preferred method when products’ costs are changing. The reason is the matching of the latest costs of products with the sales revenues of the current period. U.S. tax  rules also allow for either FIFO or LIFO, but require that the same cost flow assumption be used on both the company’s tax return and on the company’s financial statements.

By using LIFO when the costs of products are increasing, the company will be matching the recent higher costs with the current period sales. This will provide not only the improved matching of costs with revenues, it will also result in lower taxable income.

Learn more about FIFO and LIFO.