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If costs are declining, will the LIFO or FIFO method of inventory valuation yield the lower...

If costs are declining, will the LIFO or FIFO method of inventory valuation yield the lower cost of goods sold? Why? If inventory errors are said to correct themselves, why are accounting users concerned when such errors are made?

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Answer #1

In the LIFO method, the goods which are bought last are sold first. In FIFO, the goods which are bought first are sold first. In a scenario, where the prices are declining, LIFO will yield a lower cost of goods sold because the goods which are bought last (i.e. lower cost goods due to declining prices) will be sold first.

Important decisions by many stakeholders are based on periodic fianancial statements. Inventory errors affect gross profit, current assets and cost of goods sold. Errors in inventory causes fluctuations and affects business decisions. However, as these errors are self correcting, they distort the income only in two consecutive accounting periods i.e. the period of the error and the next period.

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