What Is FIFOFIFO stands for "first-in, first-out", and is a method of inventory costing which assumes that the costs of the first goods purchased are those charged to cost of goods sold when the company actually sells goods. Show
FIFO and LIFO methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks. These methods are used to manage assumptions of cost flows related to inventory, stock repurchases (if purchased at different prices), and various other accounting purposes .  InventoryInventory in a warehouse Assumptions of FIFOThis method assumes the first goods purchased are the first goods sold. In some companies, the first units in (bought) must be the first units out (sold) to avoid large losses from spoilage. Such items as fresh dairy products, fruits, and vegetables should be sold on a FIFO basis. In these cases, an assumed first-in, first-out flow corresponds with the actual physical flow of goods. Because a company using FIFO assumes the older units are sold first and the newer units are still on hand, the ending inventory consists of the most recent purchases. When using periodic inventory procedure to determine the cost of the ending inventory at the end of the period under FIFO, you would begin by listing the cost of the most recent purchase. If the ending inventory contains more units than acquired in the most recent purchase, it also includes units from the next-to-the-latest purchase at the unit cost incurred, and so on. You would list these units from the latest purchases until that number agrees with the units in the ending inventory. How is it different?Different accounting methods produce different results, because their flow of costs are based upon different assumptions. The FIFO method bases its cost flow on the chronological order purchases are made, while the LIFO method bases it cost flow in a reverse chronological order. The average cost method produces a cost flow based on a weighted average of unit costs. The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the "LIFO reserve. " This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method. How to Calculate Ending Inventory Using FIFOEnding inventory = beginning inventory + net purchases - cost of goods sold Keep in mind the FIFO assumption: Costs of the first goods purchased are those charged to cost of goods sold when the company actually sells goods. When Using FIFO
FIFO and LIFO accounting methods are used for determining the value of unsold inventory, the cost of goods sold and other transactions like stock repurchases that need to be reported at the end of the accounting period. FIFO stands for First In, First Out, which means the goods that are unsold are the ones that were most recently added to the inventory. Conversely, LIFO is Last In, First Out, which means goods most recently added to the inventory are sold first so the unsold goods are ones that were added to the inventory the earliest. LIFO accounting is not permitted by the IFRS standards so it is less popular. It does, however, allow the inventory valuation to be lower in inflationary times. What it meansFIFO stands for First In First Out and is an inventory costing method where goods placed first in an inventory are sold first. Recently-placed goods that are unsold remain in the inventory at the end of the year. LIFO stands for Last In First Out. It is an inventory costing method where the goods placed last in an inventory are sold first. The goods placed first in the inventory remain in the inventory at the end of the year. Example of FIFO and LIFO accountingA simplified FIFO and LIFO representation While this example is for inventory costing and calculating cost of goods sold (COGS), the concepts remain the same and can be applied to other scenarios as well. Suppose a business that trades in widgets makes the following purchases during the year:
This means a total of 5,200 widgets were purchased. Of these, let's assume the company managed to sell 3,000 units at a price of $7 each. Now the remaining inventory of 2,200 widgets needs to be valued. What should be the unit cost used to determine the value of this unsold inventory? This is the question that LIFO and FIFO methods attempt to answer. Using FIFOUsing the FIFO method of accounting, the unsold inventory is those goods that were acquired most recently. This means that all 1,700 widgets in Batch 3 and 500 of the 1,500 widgets in Batch 2 are considered unsold. So the value of the unsold inventory is (1,700 * $6) + (500 * $5) = $12,700. The accounting profit for the company in this scenario using FIFO is calculated as follows:
It should be noted that this is strictly an accounting concept. It's quite possible that the widgets actually sold during the year happened to be from Batch 3. But as long as they are the same, standardized widgets, Batch 3 goods are unsold for the purposes of accounting. Using LIFOUsing the LIFO method for accounting will give us different results. The value of the unsold inventory will be different because the earliest acquired goods are considered unsold in LIFO. This means all 2,000 widgets from Batch 1 and 200 of the 1,500 widgets in Batch 2 are considered unsold. So the value of the unsold inventory is (2,000 * $4) + (200 * $5) = $9,000. The accounting profit using LIFO is calculated as follows:
Reserve CalculationLIFO reserve is the difference between accounting cost of inventory calculated using the FIFO method and the one calculated using the LIFO method. During inflation (period of rising prices), the FIFO inventory cost is higher than the LIFO inventory cost. Hence, During deflation (period of falling prices), FIFO inventory cost is lower than the LIFO inventory cost. Hence,
LIFO vs FIFO Pros and ConsIn general, the FIFO method provides is applicable for more business scenarios than LIFO and also provides better accounting. Advantages include:
References
Which inventory method is best during deflation?Using LIFO for a deflationary period results in both accounting profit and value of unsold inventory being higher. Since oldest items are sold first, the number of records to be maintained decreases. Since newest items are sold first, the oldest items may remain in the inventory for many years.
Which cost flow method results in the highest net income?During periods of inflation, the use of FIFO will result in the lowest estimate of cost of goods sold among the three approaches, and the highest net income.
Which inventory method is best for net income?LIFO gives the most realistic net income value because it matches the most current costs to the most current revenues.
Which inventory cost flow method will produce the highest income and asset value in a deflationary environment?A deflationary period is when prices are decreasing. In this type of period the last-in-first-out inventory cost flow method will produce the highest net income. This is due to the fact that LIFO assumes that the most recent units purchased are sold first.
|
Which inventory cost flow method produces the highest net income in a deflationary period?
zusammenhängende Posts
Urheberrechte © © 2024 nguoilontuoi Inc.
