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Accounting

30 Interview Questions & Answers

Q&As WRITTEN BY
Bobbi Witt
Bobbi has been a finance manager for over 15 years, with direct recruiting and hiring experience in her field.
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In what instance would you use LIFO compared to FIFO?
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Example #1
"Inventory methods all depend on the type of inventory method used and how the inventory is managed. In food service or most hospitality fields, you'd use First In First Out to ensure nothing expires and is counted as waste. Whereas in a manufacturing company's inventory where nothing expires and all raw materials are the same life expectancy, you'd be able to use Last In First Out. So looking at your company, it all depends on the type of inventory method you have in place and the type of goods."
Example #2
"I've never personally used Last In First Out, but have taken courses regarding the different inventory methods. There are certain industries that have to use FIFO, like the food service industry. They need to ensure their product doesn't expire and is counted as waste. This ensures higher profits for the amount of product you have. If you have a manufacturing company where nothing expires, then the inventory method can change."

As far as accounting goes FIFO generally has higher tax implications because costs generally go up over time so you are being taxed at the current rate of inventory costs not when the inventory was bought. If you use LIFO you will be taxed at the rate you purchased the most recent inventory. This will lessen the tax implication for the inventory."
Example #3
"This will depend on the current inventory system in place. LIFO has its tax benefits but the higher the profit, the higher the tax implications will go either way. The industry matters and the products matter. For costing issues, using LIFO if costs increase the last items sold are the most expensive, while if the costs decrease, the last items sold are the least expensive.
It's also important to know to whom to report your financials. The IFRS doesn't allow for LIFO method of inventory management, while the IRS allows it with stipulations. LIFO has a lot higher standard of record keeping in case the older inventory stays in the system for years."
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