Q. In between FIFO and lifo which one is the correct method?

The differences for the four methods take place because the company paid different prices for goods purchased. No differences would take place if purchase prices were constant. Ever since a company's purchase prices are seldom constant inventory costing method affects cost of goods sold or inventory cost or gross margin and net income. Thus companies must disclose on their financial statements which inventory costing methods were used. Which one is the correct method? All four methods of inventory costing are satisfactory no single method is the merely correct method. Different methods are good under different conditions. If a company needs to match sales revenue with current cost of goods sold it would use LIFO. If a company look for to reduce its income taxes in a period of rising prices it would also use LIFO. On the other hand LIFO frequently charges against revenues the cost of goods not actually sold. As well LIFO may permit the company to manipulate net income by changing the timing of additional purchases.

The FIFO as well as specific identification methods results in a more precise matching of historical cost with revenue. Though, FIFO is able to give rise to paper profits while specific identification can give rise to income manipulation. The weighted-average method as well allows manipulation of income. Merely under FIFO is the manipulation of net income not possible.