Final answer:
FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) are asset-management methods used to manage and value inventory. FIFO assumes the oldest inventory items are sold first, while LIFO assumes the most recent items are sold first.
Step-by-step explanation:
Definitions of FIFO and LIFO
Define FIFO (First-In, First-Out) refers to an asset-management and valuation method in which assets produced or acquired first are sold, used, or disposed of first. In the context of inventory management, FIFO assumes that the oldest items in a company's inventory have been sold first and calculates the value of the remaining inventory accordingly. This is particularly relevant for companies dealing with products that have a limited shelf life or are subject to obsolescence, such as food or fashion items.
LIFO (Last-In, First-Out), on the other hand, assumes that the most recently produced or acquired items are the ones to be sold, used, or disposed of first. This method might be used in periods of inflation, where companies might benefit from higher costs of goods sold, leading to lower taxable income. However, it is not permitted for financial reporting purposes in some jurisdictions due to its potential to distort the actual financial position of the company.