In our current case however, the FIFO method will result in higher profits due to the fact that the older inventory was at held at a lower cost. The new inventory costs more, due to which the Cost of Goods Sold goes up in the LIFO method. However, when we talk to about meaningful profits, then I would say that the LIFO method is more relevant. This is because FIFO results in "inventory profits"; profits that arise merely from holding inventory; and fails to provide the best matching of costs and revenues. Thus in terms of more meaningful profit, I would say that LIFO is more meaningful as it depicts a better matching better revenues and costs.
FIFO is the costing method which depicts a better approximation of actual physical flow of goods. This is because companies generally use the oldest items in inventory first so they can continually roll the stock and prevent deterioration or obsolescence. Furthermore, it’s a matter of common sense that inventory bought in the last quarter cannot be used in the first three quarters, thus the physical flow of goods initiates from the inventory in hand at the beginning.
There will be more cash available for the management under the FIFO method and not the LIFO method. The exact amount which would be available to the management based on the income statements generated would be $5,100. This is due to the fact that in FIFO, the cost of goods is lesser, resulting in greater profits. In the LIFO method, the cost of inventory is much higher, and thus our profits shrink. The assumption that is being made here is that the net profit after taxation is the cash which is available for the management. As the income statements in Part A prove, FIFO would provide more cash rather than LIFO.
The gross profit will be lower in the average cost method when compared to the FIFO method because average cost method accounts for the expensive inventory as well as the cheaper inventory. Likewise,