Assess understanding of FIFO and LIFO calculations and appropriate use cases
Time to check your understanding! This assessment covers both the mechanics and the business consequences of FIFO and LIFO inventory methods.
FIFO Calculations
Assign oldest costs to COGS first
LIFO Calculations
Assign newest costs to COGS first
Business Strategy
When each method makes sense
FIFO (First-In, First-Out)
- • Oldest costs flow to COGS first
- • Newer costs stay in ending inventory
- • Higher reported profit when costs rise
- • Often preferred for investor presentations
LIFO (Last-In, First-Out)
- • Newest costs flow to COGS first
- • Older costs stay in ending inventory
- • Lower reported profit when costs rise
- • Can reduce taxable income in inflationary periods
Key Insight: From the exact same transactions, FIFO and LIFO produce different COGS and Ending Inventory values. That's why method choice matters for profit reporting, tax planning, and business decisions.
1. A retailer buys laptops in three waves: 10 @ $800, 15 @ $850, and 12 @ $900. If 20 units sell in March using FIFO, what Cost of Goods Sold should the ledger show?
2. Using the same purchase data, what Cost of Goods Sold results when TechStart applies LIFO to the 20 units sold?
3. In a rising-price environment, how do FIFO and LIFO typically differ on the income statement?
4. Why might a startup pitching investors prefer FIFO results during fundraising?
5. In an inflationary market, which method often appeals to a profitable, cash-rich company and why?
6. Which business is least suited for LIFO, even if it could reduce taxes?
7. What compliance step is required when a company wants to move from FIFO to LIFO for U.S. taxes?
8. During the simulation, storage costs increased when inventory piled up. How does that relate to inventory method choice?
9. How can inventory method selection influence the inventory turnover ratio?
10. When advising a business on FIFO versus LIFO, what should be the primary decision filter?
Today you learned two ways toassign costs when inventory has different price layers. In Lesson 4, you'll learn two more methods:
Specific Identification
Track the exact cost of each individual item. Perfect for unique, expensive, or serialized inventory like cars or jewelry.
Weighted Average
Blend all costs into one average. Ideal for similar items purchased frequently, like bulk materials or commodities.
By the end of Lesson 4, you'll know all four inventory methods and be able to recommend the best one for any business situation.