For businesses to manage a good stock flow, inventories help balance between new and old stock as it protects businesses from recording preventable losses. In most cases, this is achieved by the use of First In First Out (FIFO) and Last In Last Out (LIFO) models of stock tracking. LIFO is an inventory management assumes that the last unit to arrive in inventory is sold first while FIFO refers to the assumption that the oldest units of an inventory should be sold first.
Most companies and businesses prefer the FIFO method because it protects them from the ever-unstable market prices and ensures that no stock goes to waste. By clearing the old inventory, organizations can acquire new stock and value it at the current prices hence protecting themselves from losses. FIFO’s profits are more accurate because an inventory’s most recent costs reflect the stock’s actual costs in the current market.
Since companies using FIFO are more flexible in adjusting prices to match the current market, more profits attract higher taxations, meaning that the business ends up being levied higher taxes. Under LIFO, though stocks are more comfortable in case a manipulating is needed, an older inventory may not reflect current market values hence, profits might be lost if goods become obsolete or are perishable. Many businesses avoid LIFO because it can underestimate a company’s earnings in a bid to maintain low taxable incomes.
Other businesses avoid LIFO because it leads to more complex financial records, and a difficult accounting practice because unsold inventory stays in an accounting system. Unlike FIFO, which keeps inventory statements up-to-date and operating under current stock values, LIFO can lead to obsolete or outdated inventory valuations.