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Financial Accounting

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Inventory Valuation: FIFO Effect

FINACT-F1HLVS

Some companies use the First-In, First-Out (FIFO) Inventory valuation method while others use the Last-In, First-Out (LIFO) Inventory valuation method.

When a company uses the First-In, First-Out (FIFO) Inventory valuation method during times of price inflation, the amount of the Cost of Goods Sold is

while net income is

than when the Last-In, First-Out (LIFO) Inventory valuation method is used . In addition, the balance of the Inventory account reported on the year-end Balance sheet includes the

costs of items purchased by the company resulting in a

balance in that account than if the LIFO Inventory valuation method is used.