Let us take an Example of a company,say ABC:

Opening position in 2000 is: (LIFO method chosen)

Opening Inventory     = Rs. 40,000

Purchases                 = Rs. 1,71,000

Cost of goods sold     = Rs. 1,62,000

 

Opening Inventory	+ Purchases	– Cost of goods sold	= Closing Inventory
40,000	+1,71,000	– 1,62,000	= 49,000

 

·         But, since the LIFO/FIFO choice focuses on which goods were sold (& not on how much was spent on purchases), the balance sheets under FIFO would differ from B/S under LIFO.

-          What would happen to Profit & loss account under the two choices?

-          We need to ascertain the effect of these differences or cost of goods sold, in order to answer that question.