Lifo n fifo
- 1. Fundamentals of Accounting INVENTORY VALUATION
- 2. Inventory Inventory is the one of the largest current asset of a retail store or of a whole business merchandise. The sale of this inventory is the main source of revenue. Inventory contains materials/Products in three forms of conditions
- 3. Raw Materials The materials needed to make anything are called raw materials. The initial condition of any material is its raw form. Some work is needed to make a raw material into something useful Consider we were making something using steel Steel in raw form
- 4. WIP (Work in process) The process of making raw materials into some useful things Steel is melted to reshape it into something useful
- 5. Finished Good The finished product formed after doing some work on raw material. The price of finished product is considerably high from raw material We can make numerous useful products using same raw material
- 6. LIFO Last in First out In LIFO the last formed products were sold earlier then first products Products Sold
- 7. Advantages of LIFO In times of rising prices LIFO is beneficial because in LIFO the last purchased products (which were expensive than older) were sold Earlier. So the first products will be sell at greater profit. Purchased Selling Price = 100 80 80 80 Profit 2020 20 Selling Price = 150 130130 Selling Price = 200 180 70 120 To overcome it the products last purchased were sold with lower profit The advantage of lower profit is that you don’t have to pay more income- taxes But in this way income-taxes increases The more the profit the more the income-tax has to pay You can also sell first products at same profit and lower price. So in this way you can variate your price. It also happies customers. Sold at 110 20 20 Sold at 60
- 8. LIFO is also beneficial in (Non-Expiring) products. For example The price of Rice increases as it gets older Also in Non-Muslim countries the price of Wine increases as it gets older. So if we’re using LIFO the cost of old rice and wine keeps rising until we sold them.
- 9. FIFO First in First out In FIFO the first formed products were sold earlier than last formed products Products Sold
- 10. Advantages of FIFO The main advantage of FIFO is that the products were less likely to expire. Because in FIFO the oldest product is sold earlier When you’re using FIFO your inventory is showing latest prices of the products because the old products were already sold.
- 11. If Inflation (Increase in market prices) occurs. FIFO decreases the impact of inflation on the company Purchased 200030005000 Market Price = 2000Market Price = 3000Market Price = 5000 Profit 3000 Market Price = 6000 6000 30001000 Instead of Market Price = 7000
- 13. Purchased Sold Balance Date Units Unit Cost Total Cost Units UnitsUnit Cost Unit Cost Total Cost Total Cost 5 Feb 2 1000 2000 2 1000 2000 7 Feb 7 1200 8400 2 7 1000 1200 10400 10 Feb 1 1000 1000 1 7 1000 1200 9400 12 Feb 1 1000 1000 0 7 1000 1200 8400 FIFO
- 14. Purchased Sold Balance Date Units Unit Cost Total Cost Units UnitsUnit Cost Unit Cost Total Cost Total Cost 5 Feb 2 1000 2000 2 1000 2000 7 Feb 7 1200 8400 2 7 1000 1200 10400 10 Feb 1 1200 1200 2 6 1000 1200 9200 12 Feb 2 1200 2400 2 4 1000 1200 6800 LIFO
- 15. Purchased Sold Balance Date Units Unit Cost Total Cost Units UnitsUnit Cost Unit Cost Total Cost Total Cost 5 Feb 2 1000 2000 2 1000 2000 7 Feb 3 1200 3600 5 1120 5600 10 Feb 1 1120 1120 4 1120 4480 Average 2000+3600=5600 2+3=5 5600/5=1120
- 16. The End