Using the LIFO method, the cost of goods sold for the quarter would be $7,000, or $5,000 for the first 10,000 board feet, and the same $2,000 for the remaining 500 board feet.
The FIFO method would result in $2,000 less in cost of goods sold and $2,000 more in profit than the LIFO method, even though the business performed the same activities.
Understanding FIFO is helpful if you’re running a business, if you’re an investor, or if you’re interested in knowing more about how business accounting works. There are other types of accounting methods, including specific identification, which requires businesses to track each individual unit that’s sold, but FIFO is the most common method for financial reporting because it’s straightforward and intuitive.
Whether you’re investing in a bull market or not, understanding FIFO is one of the many steps you can take to learn more about the businesses you’re investing in.