1. lifo benefit
The biggest benefit of LIFO is a tax advantage. During times of inflation, LIFO results in a higher cost of goods sold and a lower balance of remaining inventory. A higher cost of goods sold means lower net income, which results in a smaller tax liability.
2. fifo benefit
FIFO is a more realistic inventory method than LIFO. Most companies try to sell their oldest inventory first to reduce the risk of obsolescence and spoilage, so costs are generally more accurate. This can help the business with planning and forecasting. During times of inflation, FIFO has the effect of increasing the value of remaining inventory and increasing net income. Showing large assets and income can help a company that's trying to lure in potential investors and lenders.
LIFO vs. FIFO: Inventory Valuation Explained
We describe how to calculate the inventory item on the balance sheet using FIFO, LIFO, and average cost methods, and consider the results of each.
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