Question

Write the advantages and limitations of valuation where last purchase are issued first؟?

Answer 1

Last-in First-out (LIFO) is the method in which goods which are purchased last are sold out first.

Advantages:

i) If the prices are rising, cost of goods sold will be higher resulting in lower amount of taxes.

ii) The cost and revenue can be matched properly by using the LIFO method.

Disadvantages:

i) Under LIFO, inventory can be understated when prices are rising because higher cost of goods sold may reflect low inventory.

ii) Liquidation under LIFO may lead to higher amount of taxes.