LIFO or FIFO? Which one is preferable?

In the inflationary situation which method of inventory valuation would you prefer, LIFO or FIFO? 

In the accounting procedure of a firm’s inventory valuation there are two well known methods, which are widely used. The methods are LIFO shortened for “Last in first out” and FIFO elaborated as “First in first out”. The consideration of any of these methods in the inventory valuation process affects not only the value of inventory but the entire procedure from the value of inventory to the income tax calculation is influenced.

For instance, if we consider an inflationary situation then we should follow the LIFO method because in long run it will be more beneficial than the FIFO method. Let’s have a glimpse at the matrices below –

	FIFO	LIFO
Value of Inventory	Higher	Lower
Cost of Goods sold	Lower	Higher
Net Income	Higher	Lower
Impact on income tax	Higher	Lower

According to the above matrix if you go for the FIFO method then our value of ending inventory would be higher while calculating the cost of goods sold, where on the other hand the cost of goods sold will be lowered. Consequently, the net income will be shown with a higher value and this will ultimately result into a greater amount of income tax payable. 

If we consider the LIFO method then every of the circumstances in the above metrics will be vice versa from that of the FIFO method therefore to evade the higher income tax we should go for the LIFO method of inventory valuation in the inflationary situation. 

As an argument in favor for choosing LIFO method as and adoptable method of the valuation of inventory we can represent following to notations as stated below –

1. To match inventory costs and cost of goods sold at current price against current revenue.
2. Under LIFO, Net income can be shown lower which allows the company to pay lower amount of tax.

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