Similarities & Differencees
There really aren’t any similarities between LIFO and FIFO. They are basically two different inventory management techniques. One thing that can be said about LIFO and FIFO is that both methods only work if the product remains the same–the only change is the cost of the product. If you need help in deciding LIFO vs FIFO, you need to look at the differences.
LIFO and FIFO affect a company’s earnings in different ways. Let’s start off by looking at one month of balance sheet using the FIFO method. Let’s say that at the beginning of the month you have 30 of a particular product that costs you $20. Then you receive another 50 of the product at a slightly higher price, $21 dollars. After you have your product, an order is placed for 40 of them. With FIFO, you sell all 30 of your starting inventory and 10 from the second group you received. To figure out the cost of sales, you multiply 30 times $20 dollars and add to it 10 times $21. That would be a total of $810.
Now take the same situation and apply the LIFO accounting method. According to LIFO, the order for 40 of your product is filled using only the newest product you received. $21 multiplied by 40 is $840. A difference of 6.5 percent ($30) between the two methods may not seem like much in this example, but when you are talking about moving hundreds or thousands of products a month over the course of a year–it adds up.
LIFO allows you to account for the current cost of your inventory. This is important at tax time during periods of inflation. While FIFO generally results in higher earnings, it also generates higher taxes. The earnings after-tax are lower. With LIFO the earnings, and therefore the taxes, are lower. This results in a higher earning after taxes.