Independent calculation of FIFO and LIFO with business recommendation
Inventory Valuation Challenge
Now you'll apply what you've learned about FIFO and LIFO to a new scenario — independently, with minimal guidance. This is your chance to demonstrate mastery.
Sarah has expanded her business to offer software installation and training packages for premium clients. Over the past month, she's tracked her inventory purchases carefully. Each purchase came at a different cost as demand increased.
Now she needs to calculate her Cost of Goods Sold and Ending Inventory for the month. She's considering which inventory method would be best for an upcoming investor presentation.
Your task: Calculate both FIFO and LIFO values independently, then make a recommendation for which method Sarah should use when presenting to investors.
First-In, First-Out: Assign the oldest costs first to COGS. Work from the earliest purchase to the latest until you've accounted for all units sold.
Last-In, First-Out: Assign the newest costs first to COGS. Work from the latest purchase backward until you've accounted for all units sold.
The method you recommend for Sarah depends on her goals. In real businesses, accountants and managers make these decisions based on multiple factors:
For Investors
Higher profits and higher inventory values often make the business appear more valuable and financially healthy.
For Taxes
Lower reported profits mean lower taxable income, which can preserve cash for reinvestment in the business.
For Cash Flow
The actual cash spent on inventory doesn't change—only how it's reported. Both methods track the same real cash outflows.
For Consistency
Once a business chooses a method, they must use it consistently year after year (with rare exceptions).
Note: LIFO is not permitted under International Financial Reporting Standards (IFRS). It's only allowed under U.S. GAAP.