FIFO and LIFO are the two most common cost flow assumptions made in costing inventories. The amounts assigned to the same inventory items on hand may be different under each cost flow assumption. If a company has no beginning inventory explain the difference in ending inventory values under the FIFO and LIFO cost bases when the price of inventory items purchased during the period have been (1) increasing (2) decreasing and (3) remained constant.

The FIFO method determines the ending inventory by the cost of the most recent purchase. The LIFO method determines the ending inventory by the cost of the earliest purchase. Therefore if the FIFO method is used and the prices during the period are increasing the ending inventory under FIFO will be greater than under LIFO. Likewise if the FIFO method is used and the prices during the period are decreasing the ending inventory under FIFO will be less than under LIFO. If prices remain constant and the company has no beginning inventory then there will be no difference in ending inventory.