FIFO vs LIFO Inventory Costing

Calculate cost of goods sold and ending inventory using both FIFO and LIFO methods. Analyze the impact on financial statements during rising prices.

Problem Scenario

Taylor Company uses a periodic inventory system. Beginning inventory and purchases for the month are: Beginning inventory: 100 units @ $10 each. Purchase 1 (Mar 5): 150 units @ $12 each. Purchase 2 (Mar 15): 200 units @ $14 each. Purchase 3 (Mar 25): 50 units @ $15 each. Units sold during March: 350 units at $25 each.

Given Data

Beginning Inventory100 units @ $10 = $1,000

Purchase 1150 units @ $12 = $1,800

Purchase 2200 units @ $14 = $2,800

Purchase 350 units @ $15 = $750

Total Available500 units = $6,350

Units Sold350 units

Selling Price$25 per unit

Requirements

Calculate ending inventory and COGS using FIFO
Calculate ending inventory and COGS using LIFO
Calculate gross profit under each method
Explain which method results in lower taxes

Solution

Step 1:

Calculate total goods available and units remaining: Total units = 100 + 150 + 200 + 50 = 500 units. Ending inventory = 500 - 350 = 150 units.

Step 2:

FIFO Method (First In, First Out): Oldest costs go to COGS. COGS = 100 @ $10 + 150 @ $12 + 100 @ $14 = $1,000 + $1,800 + $1,400 = $4,200. Ending Inventory = 100 @ $14 + 50 @ $15 = $1,400 + $750 = $2,150.

Step 3:

LIFO Method (Last In, First Out): Newest costs go to COGS. COGS = 50 @ $15 + 200 @ $14 + 100 @ $12 = $750 + $2,800 + $1,200 = $4,750. Ending Inventory = 100 @ $10 + 50 @ $12 = $1,000 + $600 = $1,600.

Step 4:

Gross Profit Calculation: Revenue = 350 × $25 = $8,750. FIFO Gross Profit = $8,750 - $4,200 = $4,550. LIFO Gross Profit = $8,750 - $4,750 = $4,000.

Final Answer

FIFO: COGS = $4,200, Ending Inventory = $2,150, Gross Profit = $4,550. LIFO: COGS = $4,750, Ending Inventory = $1,600, Gross Profit = $4,000. LIFO results in $550 lower gross profit and thus lower taxes during rising prices.

Key Takeaways

✓In rising prices: FIFO = higher income, higher taxes; LIFO = lower income, lower taxes
✓FIFO ending inventory is closer to current costs
✓LIFO COGS is closer to current costs (better matching)
✓LIFO is not allowed under IFRS, only US GAAP

Common Errors to Avoid

✗Mixing up which costs go to COGS vs ending inventory
✗Calculating the wrong number of units in ending inventory
✗Forgetting to verify: COGS + Ending Inventory = Goods Available

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FAQs

Common questions about this problem type

During periods of rising prices, LIFO produces lower taxable income and thus lower tax payments. This cash flow benefit can be significant. However, LIFO also results in older, lower costs on the balance sheet.

COGS + Ending Inventory should always equal Cost of Goods Available for Sale. Check: FIFO: $4,200 + $2,150 = $6,350. LIFO: $4,750 + $1,600 = $6,350. Both equal the total goods available.