[FinancialAccoun]

Hi, I am confused about LIFO and FIFO assumptions,
> When the cost of inventory is declining, the method that will result in a
> company reporting the highest net income is:
>
> LIFO, how come it is LIFO?
>
> how does FIFO produce the highest net income when the units costs are
> rising?

Can you provide the answer with more details and maybe an example? Thanks

[CaptainForest]

Best way to show it to you would be an example.

Example 1. Costs are declining.

The first 100 units purchases on Jan 1 were at $5 per unit. So a total value of $500.
The next 100 units were purchases on Jan 23 at $2 per unit. So a total value of $200.

Now, if we used FIFO, out cost would be 500. If we used LIFO, our cost would be 200.

Now, let's say we have sales of 900.

Therefore, under FIFO, NI is 400 vs. a NI of 700 if we use LIFO. Therefore, NI is HIGHRER when using LIFO if costs are declining.

And if costs are rising, the opposite is true, and FIFO would give us a higher net income.