FIFO and LIFO
- 2. WHAT IS INVENTORY TO A COMPANY AND WHY GIVE IT A VALUE Inventory is goods and material that a business holds for the purpose of resale. Inventory is a given value for two main purpose 1.insurance and 2.profit
- 3. FIFO FIRST IN FIRST OUT
- 4. FIFO : This inventory method matches sales with inventory by matching revenue from the first sale with the costs associated with the first product that was made first in first out.
- 5. EXAMPLE: FIFO&LIFO 1.OPENING BALANCE- 100UNITS@Rs.5 EACH 5.RECEIVED -500UNITS@Rs.6 EACH 20.ISSUED-300UNITS 7.RECEIVED -600UNITS@Rs.5 EACH 25.RETURNEDTO SUPPLIER - 50UNITS PURCHASED ON 7th FEBRUARY JANUARY FEBRUARY
- 6. JAN 1 opening balance in this sum 100units,each units have Rs.5. In JAN 5 we received 500 units, each units have Rs.6 and enter into the Recepits coloumn as GRN. In JAN 20 we issued 300 units from first stock @Rs.5 and remaining units taken from GRN. In FEB 7 we received 600 units each units have Rs.5 and enter into recepits coloumn as GRN. In FEB 25 we returns 50 units from FEB 7 @ each Rs.5. Finally we have 850 units @ Rs.11 so we get Rs.9350. The opening balance in this sum 100units,each units have Rs.5. In JAN 5 we received 500 units, each units have Rs.6 and enter into the Recepits coloumn as GRN. In JAN 20 we issued 300 units from last stock @Rs.6. In FEB 7 we received 600 units each unit have Rs.5 . In FEB 25 we returns 50 units from FEB 7 @ each Rs.5. Finally we have 850 unita@ Rs.11 so we get Rs.9350.
- 7. LIFO
- 8. LIFO is a method of accounting for valuing inventory .This method is based on the assumption that the last item placed in the inventory will be sold out first, i.e, reverse chronological order will be followed in issuing inventory from the stores.
- 9. LIFO It represents the oldest stock. LIFO shown by the cost of goods sold. Income tax shows minimum amount, when there is inflation in the economy. In case of deflation, larger amount of income tax is shown. FIFO It represents the latest stock. FIFO shown by the cost of unsold stock. In inflationary condition, income tax shows a higher amount. Reduced income tax will be shown in deflationary condition.
- 10. CONCLUSION Both the methods LIFO and FIFO has its pros and cons. LIFO does not inflate profits when the prices of product are rising, but there are complications in this method. FIFO is very simple to understand as well as to operate.