In Accounting, Inventory is considered an asset. As a result, proper methods are used to assign costs to inventory. The three methods used to assign costs to inventory are LIFO, FIFO, and Average Cost. LIFO simply means Last in, First out. FIFO means First in, First Out and Average Cost is the weighted average cost of the inventory.
The FIFO method (First in, First out), states that items bought first are sold first. Due to rising prices in the economy, selling the first items in inventory tends to lower the Cost of Goods Sold and generate more profit, as shown in the Vialogues below. On the contrary, the LIFO method (Last in, First out), states that items bought last are sold first. By selling the last items first, Cost of Goods Sold tend to increase, which leads to lower profits. Consequently, many companies have shunned from using the LIFO method. Please feel free to watch this Vialogues and ask any question.