LIFO vs FIFO Depreciation Assignment Example | Topics and Well Written Essays - 750 words

LIFO vs FIFO Depreciation - Assignment Example LIFO method results to low net earnings by the company. However, if the company switches to FIFO it will result to Sgreater earnings, but under the condition that price remains invariable during trading period. However, using weighted average could result to greater earnings for the company.Increase in price of assets over time makes FIFO method to yield superior returns than LIFO method since overhead expenditure is lower than returns after increase in value of commodities (Mckee, Garner & Mckee, Y., 2000).   Regardless of the method used, companies would get uniform earnings in the absence of inflation. Also, using weighted average method results to a value which is higher than that of LIFO method, but lower than that of FIFO method.Companies use LIFO approach in order to counter the effects of inflation hence pays less tax. FIFO method is significant in a steady economy, but is helpful when economy is facing increase in price of commodities, because companies can report greater earnings than any other method. However, this result a mismatch of the expenditures incurred in production and the earnings from the products.  Most companies prefer LIFO method when estimating the value of their stock because the associated expenditure is most recent and is generally higher than actual expenditure. This enables companies to pay less income tax to the state. On the other hand, FIFO method is vital in an economy facing inflation because increase in prices result to increase in earnings.