LIFO vs FIFO Under Conditions of "Certainty".

Abstract The article compares the various effects of the two methods of inventory valuation, namely, last in, first out (LIFO) and first in, first out (FIFO), with those produced by a model of complete certainty. This model equates profits with the internal rate of return needed to reduce all the cash flows to the present value of the investment in the enterprise. The model of complete certainty does not value the individual assets but rather it puts a value on the whole enterprise, including its positive or negative goodwill. The considerable argument which occurred over LIFO vs. FIFO some years ago was almost entirely literary in content, and if the results of using both methods can be compared with the true result, it may be that some conclusions can be drawn as to which method of approximation may be most suited to a particular circumstance. It is true to say that the profits shown under FIFO and the correct profits are both partially unavailable for distribution. LIFO overcomes this to the extent it is able to ignore the initial purchase of goods, which is carried forward as inventory, while otherwise recognizing profits on a cash basis only.