What are LIFO and FIFO
LIFO stands for “last-in-first-out” and FIFO stands for “first-in-first-out”. These two terms are commonly used in computer science, inventory control and cost accounting. Although these terms are as it is used but their meaning is different in each field.In terms of inventory control LIFO assumes that the last items placed in inventory are the first sold during an accounting year. Thus, the inventory at the end of a year consists of the goods placed in inventory at the beginning of the year, rather than at the end. LIFO is one method used to determine Cost of Goods Sold for a business. Under FIFO, the oldest units are assumed to be sold first, so the cost of goods sold is based on historical inventory costs.
The choice of the method of inventory accounting by a small business can directly impact its balance sheet, income statement, and statement of cash flows. FIFO and LIFO accounting methods manage the financial end of a company’s inventory. Each one has its own benefits and disadvantages and one of them is actually preferred over the other by most businesses.
In computer science LIFO is used in “stack” means that the data which has entered at the last will be first served and FIFO is used for “queue” because in queue the data at the front of structure is handled first. Different data structures are available for handling data so depending upon the requirement appropriate data structure is chosen.
In accounting, LIFO assumes that the last items put on the shelf are the first items sold. LIFO is a good system to use when your products are not perishable or become obsolete. Under LIFO, when prices rise, the higher priced items are sold first and the lower priced products are left in inventory. This increases a company’s cost of goods sold and lowers their tax liability and, as a result, their net income.
FIFO assumes that the first items put on the shelf are the first items sold, so your oldest goods are sold first. This system is generally used by companies whose inventory is perishable or subject to quick obsolescence. If prices go up, FIFO will give you a lower cost of goods sold because you are using your older, cheaper goods first. Your bottom line will look better to your investors, if you have any, but your tax liability will be higher because you have higher profit. A positive about the FIFO method is that it represents recent purchases and, as such, more accurately reflects replacement costs.