Explain how the adoptions of FIFO method rather than LIFO will tend to raise or lower the quality of a company’s earnings? Assume the continuance of the inflation.
During the period of inflation, prices increase. Under the FIFO method, valuation of closing inventory is made at most recent prices or at increased prices and closing inventory is shown at the credit side of trading & P&L account (income statement) with increased value, as a result of which net income of the company increases because of increase in the value of closing inventory ultimately company’s earnings increases. Where as under the LIFO method company’s earnings decreases because of decrease in the value of closing inventory