when there is zero inflation all three inventory costing methods produce the same result but if inflation is high the choice of accounting method can dramatically affect valuation ratios fifo lifo and average cost have different impacts 
in times of deflation the complete opposite of the above is true example of lifoassume company a has 10 widgets the first five widgets cost 100 each and arrived two days ago the last five widgets cost 200 each and arrived one day ago based on the lifo method of inventory management the last widgets in are the first ones to be sold seven widgets are sold but how much can the accountant record as a cost each widget has the same sales price so revenue is the same but the cost of the widgets is based on the inventory method selected based on the lifo method the last inventory in is the first inventory sold this means the widgets that cost 200 sold first the company then sold two more of the 100 widgets in total the cost of the widgets under the lifo method is 1 200 or five at 200 and two at 100 in contrast using the fifo method the 100 widgets are sold first followed by the 200 widgets so the cost of the widgets sold will be recorded as 900 or five at 100 and two at 200 this is why lifo creates higher costs and lowers net income in times of inflation it also reduces taxable income 4in periods of deflation lifo creates lower costs and increases net income which also increases taxable income 