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Inventories..cpt

12 October 2012

Hello Friends, I Am having problem in understanding The method of inventories valuation with LIFO & FIFO Method, so please can Explain Me with examples? . thanx

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2 Replies

deepali agarwal (Company Secretary) (1289 Points)
Replied 12 October 2012

FIFO works like how you maintain your fridge at home. After you have bought some groceries, you tend to place what you just bought at the back of the fridge in order to finish off the older food before it spoils.

In other words, under FIFO, the oldest goods are sold first and the newest goods are sold last.

As a formula it would look like this

Unit Cost per batch = (Cost/Quantity) for each batch

where

Cost of Goods Sold = (Unit Cost x Quantity) for each batch

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deepali agarwal (Company Secretary) (1289 Points)
Replied 12 October 2012

LIFO is the opposite of FIFO. Instead of the oldest inventory being considered as sold first, the newest product is sold first. While the factory analogy works for the FIFO, consider a bakery. By lunch or evening, the bread baked from the morning will not sell as well as the fresh ones from the afternoon batch. This means that cost of the latest inventory now becomes the COGS with the cost of the oldest inventory being assigned to the inventory value on the balance sheet. The equation is essentially the same as FIFO since both are calculated based on batches of unit sold. Unit Cost per batch = (Cost/Quantity) for each batch where Cost of Goods Sold = (Unit Cost x Quantity) for each batch Using the toy example, the 1,000 units sold on Wednesday would have a COGS of $1.05 per unit, with the remaining 1,000 toys being valued at $1 each.