Fifo and Lifo Inventory Methods
FIFO and LIFO Inventory Methods
Tonia Green
Accounting 211 – Financial Accounting
Excelsior College
FIFO and LIFO Inventory Methods This paper will provide a comparison of the accounting implications of valuing inventory under the First-in, First-out (FIFO) and Last-in, First-out (LIFO) methods. With very few exceptions, every business depends on an inventory to operate. Whether the business provides a service or sells products to its consumers, supplies and stock are required to operate. In the complex process of business accounting, keeping track of inventories, cost of goods and unit pricing are vital to the company's success especially with price fluctuations of products the company purchases. Several methods are used to determine inventory costing. Two of the most common types of inventory costing are the FIFO and LIFO. Which method a company uses can directly affect its financial statements.
FIFO Cost Inventory Method The FIFO method is the more aggressive inventory valuing method (Jae, 2011). Under FIFO, the first items purchased are the first to leave the store. For accounting purposes, the oldest unit price paid will be used until the units bought at that price are gone. The unit amount of a second purchase of goods would be then used to compute the cost of goods sold. For example, Company A started with five watches purchased at $12 a piece, and 10 purchased 10 watches for $15 each on July 3rd. A second purchase of 25 watches on July 15th cost Company A $17 each. The following table shows the FIFO costing:
Beg Balance Cost of Goods Sold (20 Units)
July 1st (5 Units @ 12) $60 5 @ $12 $60
July 3rd (10 Units @ 15) $150 10 @ $15 $150 $295
July 15th (25 Units @ 17) $425 5 @ $17 $85
End Balance (20 Units @ $17) $340 Under the FIFO method, the costs of goods of the oldest items in the inventory are accounted first. The ending inventory is based on the latest costs of the units. For this example, $17
Tonia Green
Accounting 211 – Financial Accounting
Excelsior College
FIFO and LIFO Inventory Methods This paper will provide a comparison of the accounting implications of valuing inventory under the First-in, First-out (FIFO) and Last-in, First-out (LIFO) methods. With very few exceptions, every business depends on an inventory to operate. Whether the business provides a service or sells products to its consumers, supplies and stock are required to operate. In the complex process of business accounting, keeping track of inventories, cost of goods and unit pricing are vital to the company's success especially with price fluctuations of products the company purchases. Several methods are used to determine inventory costing. Two of the most common types of inventory costing are the FIFO and LIFO. Which method a company uses can directly affect its financial statements.
FIFO Cost Inventory Method The FIFO method is the more aggressive inventory valuing method (Jae, 2011). Under FIFO, the first items purchased are the first to leave the store. For accounting purposes, the oldest unit price paid will be used until the units bought at that price are gone. The unit amount of a second purchase of goods would be then used to compute the cost of goods sold. For example, Company A started with five watches purchased at $12 a piece, and 10 purchased 10 watches for $15 each on July 3rd. A second purchase of 25 watches on July 15th cost Company A $17 each. The following table shows the FIFO costing:
Beg Balance Cost of Goods Sold (20 Units)
July 1st (5 Units @ 12) $60 5 @ $12 $60
July 3rd (10 Units @ 15) $150 10 @ $15 $150 $295
July 15th (25 Units @ 17) $425 5 @ $17 $85
End Balance (20 Units @ $17) $340 Under the FIFO method, the costs of goods of the oldest items in the inventory are accounted first. The ending inventory is based on the latest costs of the units. For this example, $17
References: Deloitte. (2004, June 22). IAS PluS. Key Differences Between IFRSs and US GAAP. Retrieved November 28, 2012, from http://www.iasplus.com/iasplus/0406ifrsus.pdf. Harrison, W., Horngren, C., & Thomas, W. (2010). Financial Accounting (8th edition). Upper Saddle River, NJ: Pearson Prentice Hall. Jae, J. (2011, March 27). FIFO LIFO Inventory Valuation Methods. Retrieved November 28, 2012, from Old School Value: http://www.oldschoolvalue.com/blog/valuation-methods/fifo-lifo-average-inventory-valuation. LIFO FIFO Inventory Valuation Methods. (n.d.). Retrieved November 28, 2012, from Business Accounting Guides: http://business-accounting-guides.com/lifo-fifo.