Final answer:
LIFO usually produces a lower gross profit than FIFO because it assigns the cost of the most recent and usually more expensive inventory to the cost of goods sold, resulting in higher cost of goods sold and lower gross profit. FIFO, on the other hand, assigns the cost of the oldest and usually less expensive inventory to the cost of goods sold, resulting in lower cost of goods sold and higher gross profit.
Step-by-step explanation:
LIFO (Last-In, First-Out) and FIFO (First-In, First-Out) are methods used to calculate the cost of goods sold and the value of inventory. The main difference between these methods is the order in which the inventory is valued and sold. LIFO assumes that the most recent inventory purchased is sold first, while FIFO assumes that the oldest inventory purchased is sold first.
The reason why LIFO usually produces a lower gross profit than FIFO is because LIFO assigns the cost of the most recent and usually more expensive inventory to the cost of goods sold, resulting in higher cost of goods sold and lower gross profit. This is particularly true when prices of inventory are increasing over time. On the other hand, FIFO assigns the cost of the oldest and usually less expensive inventory to the cost of goods sold, resulting in lower cost of goods sold and higher gross profit.
For example, let's say a company purchased 10 units of a product at $10 per unit and then purchased 10 more units at $12 per unit. If the company sells 10 units using LIFO, the cost of goods sold would be $120 ($12 per unit for the most recent inventory). But if the company sells 10 units using FIFO, the cost of goods sold would be $100 ($10 per unit for the oldest inventory). The difference in the cost of goods sold results in a lower gross profit for LIFO.