LIFO AND FIFO METHOD

Inventory Valuation DEFINITION:
Inventory refers to the stock of goods in which a business enterprise deals with. According to AS-2 (Revised) issued by the Institute of Chartered Accountants of India

Therefore the inventories include:
• • • Finished goods Work-in-Process: Rawmaterial & supplies
PURPOSE OF INVENTORY VALUATION

Proper valuation of inventory has a very significant bearing on the authenticity of the financial statements. However, it must be clearly understood that proper valuation of inventory poses problem only when there is a change in the level of prices and different lots are purchased at varying prices

Following methods are generally used to determine Historical cost of inventory: • Specific identification. • First in first out (FIFO) • Last in first out (LIFO) • Average (Weighted) cost.

From the following data ,calculate the value of inventory on 31st Jan .1998 by FIFO methods
1st Jan 4th Jan 10th Jan 20th Jan 2th Jan 7th Jan 12th Jan opening stock 200pieces @Rs 2 each purchases 100 pieces @Rs 2.20 each purchases 150 pieces @Rs 2.40 each purchases 180 pieces @Rs 2.50 each Issues 150 pieces Issues 100pieces Issues 200pieces

DATE

RECEIPTS
Qty Rate Amt

ISSUED
Qty Rate Amt

BALANCE
Qty Rate Amt

1 Jan 2Jan 4Jan 150 100
2.20 220

200 2.00 300 50 50 100

2.00 2.00 2.00 2.20

400 100 100 220

7 Jan 10Jan 150 12Jan 20Jan 180 2.50 450 2.40 360

50 50

2.00 2.20

100 110

50 50 150

2.20 2.20 2.40

110 110 360

50 150

2.20 2.40

110 360 180 2.50 450

Closing stock 180 quantity 2.20 units 180 * 2.50 =450

EXAMPLE ON LIFO
Record the following entry in respect of material number 154 for the month of may 2008 May1 Balance 3000 units at Rs.9/unit May3 Purcheased 10,000 units at rs.10.20/unit May6 Purcheased 2000 units at rs.11/unit May10 Issued 4000 units May12 Purcheased 5000 units at rs.12/unit May17 Issued 14000 units MAY 19 Issued 1000 units

Date May 1 May 3

Receipts Qty. --Rate --Amt. ---

Issues Qty. --Rate ----Amt. -----

Method Material Balance Qty. 3000 3000 1000 Rate 9 9

: LIFO : 154 Amt. 27000 27000

10000 10.20

102000 ---

10.20 102000 9 27000

May 6

2000

11

22000

---

---

---

3000

10000 10.20 102000 --May 10 ------------2000 2000 --11 --22000 9 27000 2000 11 22000

10.20 20400 3000 8000

10.20 81600 9 27000

May 12 5000

12

60000

---

---

---

3000

ADVANTAGES AND DISADVANTAGES OF FIFO
Advantages  It values stock nearer to current market prices  It is cost based  It is realistic Disadvantages  It involves complicated calculations  Comparison between different jobs using same type of material becomes difficult

Advantages of LIFO Method: •Nearer to the market price •Income tax can be reduced •No unrealized inventory Disadvantages of LIFO Method: •Not conform to the physical flow of goods •Involves a lot of calculation work •Comparison among similar jobs is very difficult

CONCLUSION
Depending upon cost of raw materials FIFO and LIFO methods are used.

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