# Fifo method question and answer pdf

The method a company uses to assess their inventory costs will affect their profits. The amount of profits a company declares will directly affect their income taxes.

The methods are not actually linked to the tracking of physical inventory, just inventory totals. However, in order for the cost of goods sold COGS calculation to work, both methods have to assume inventory is being sold in their intended orders. Most businesses offload oldest products first anyway — since older inventory might become obsolete and lose value. As such, FIFO is just following that natural flow of inventory, meaning less chance of mistakes when it comes to bookkeeping.

LIFO allows a business to use the most recent inventory costs first. These costs are typically higher than what it cost previously to produce or acquire older inventory. As such, profits are lower. Although this may mean less tax for a company to pay under LIFO, it also means stated profits with FIFO are much more accurate because older inventory reflects the actual costs of that inventory.

If profits are naturally high under FIFO, then the company becomes that much more attractive to investors. The problem with a company switching to the LIFO method is that the older inventory may stay on the books forever, and that older inventory if not perishable or obsolete will not reflect current market values. It will be understated. Multiply that cost by the amount of inventory sold.

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Prices paid by a company for its inventory often fluctuate. These fluctuating costs must be taken into account regardless of which method a business uses. Lastly, the product needs to have been sold to be used in the equation.

A company cannot apply unsold inventory to the cost of goods calculation.

Ted has been in operation now for a year. This is what his inventory costs looks like:. As you can see, the unit price of televisions steadily increased. Going by the FIFO method, Ted needs to use the older costs of acquiring his inventory and work ahead from there.

Going by the LIFO method, Ted needs to go by his most recent inventory costs first and work backwards from there. This is because the LIFO number reflects a higher inventory cost, meaning less profit and less taxes to pay at tax time.

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### First-In, First-Out Inventory Method

This method assumes that inventory purchased or manufactured first is sold first and newer inventory remains unsold. Thus cost of older inventory is assigned to cost of goods sold and that of newer inventory is assigned to ending inventory. The actual flow of inventory may not exactly match the first-in, first-out pattern. First-In, First-Out method can be applied in both the periodic inventory system and the perpetual inventory system.

The following example illustrates the calculation of ending inventory and cost of goods sold under FIFO method:. Use the following information to calculate the value of inventory on hand on Mar 31 and cost of goods sold during March in FIFO periodic inventory system and under FIFO perpetual inventory system. You are welcome to learn a range of topics from accounting, economics, finance and more. We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable.

Let's connect! Go to top Example Join Discussions. Join Discussions All Chapters in Accounting. Current Chapter. About Authors Contact Privacy Disclaimer. Follow Facebook LinkedIn Twitter.The conversion cost in this beginning wo Hanson Company uses the weighted-average method in its process costing system.

The first processing department, the Welding Department, started the month with 17, units in its beginning work in The first processing department, the Welding Department, started the month with 24, units in its beginning work in process The first processing department, the Welding Department, started the month with 17, units in its The first processing department, the Welding Department, started the month with 14, units in its beginning work in process Questions Courses.

Oct 30 AM. Mark B answered on October 30, FIFO costing excludes the equivalent units and costs in beginning work in process prior-period costs from the current-period unit cost calculations. Only current-period work and current-period costs are used to compute FIFO unit costs. Do you need an answer to a question different from the above? Ask your question!

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### FIFO AVCO question, please with detailed workings @johnmoffat

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Review Please. Next Previous. Related Questions. The first processing. Posted 4 years ago. The first processing department Posted 2 years ago.As inventory is usually purchased at different rates or manufactured at different costs over an accounting period, there is a need to determine what cost needs to be assigned to inventory.

Inventory cost at the end of an accounting period may be determined in the following ways:. This method assumes that inventory purchased first is sold first. Therefore, inventory cost under FIFO method will be the cost of latest purchases. Consider the following example:. The sales made on January 5 and 10 were clearly made from purchases on 1st January. Of the sales made on January 25, it will be assumed that 2 bikes relate to purchases on January 1 whereas the remaining one bike has been issued from the purchases on 15th January.

Therefore, the value of inventory under FIFO is as follows:. As can be seen from above, the inventory cost under FIFO method relates to the cost of the latest purchases, i. ABC Co.

FIFO and LIFO(Pricing of material issue) with solved problem :-by kauserwise

Ltd sells leather jackets. Due to the seasonal nature of the business, ABC Co sells its merchandise as soon as possible to avoid the risk of downward fluctuation in prices towards the end of the winter season.

Which of the following methods is most suitable for the valuation of ABC Co's inventories? LIFO method values inventory on outdated prices. Since under FIFO method inventory is stated at the latest purchase cost, this will result in valuation of inventory at price that is relatively close to its current market worth.

This should increase the relevance of accounting information. Every time a sale or purchase occurs, they are recorded in their respective ledger accounts. However, as we shall see in following sections, inventory is accounted for separately from purchases and sales through a single adjustment at the year end.

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Theoretically, the cost of inventory sold could be determined in two ways. One is the standard way in which purchases during the period are adjusted for movements in inventory. The second way could be to adjust purchases and sales of inventory in the inventory ledger itself.

The problem with this method is the need to measure value of sales every time a sale takes place e. If accounting for sales and purchase is kept separate from accounting for inventory, the measurement of inventory need only be calculated once at the period end.

This is a more practical and efficient approach to the accounting for inventory which is why it is the most common approach adopted. LIFO Method. FIFO Method. Select a topic. Introduction to Accounting for Inventory. AVCO Method. Accounting Treatment: Inventories.Issue of materials Materials issued from stores are debited to the jobs or work orders which received them and credited to the materials account.

These jobs are debited with the value of materials issued to them. But what is the value of materials? Theoretically the value includes the invoice price less trade discount, the freight, cartage, octroi and insurance on incoming materials, expenses of purchase, receiving, storing and record keeping and carriage from the stores up to the process plant.

However, in practice, it involves minute calculations for including all these expenses and is a big task compared to the benefit derived from it. Moreover the price changes according to the market conditions and at any given time there will be stock of materials purchased at different times at different prices. Hence the problem as to at what price the materials should be issued?

There are many methods of pricing material issues. Under this method material is first issued from the earliest consignment on hand and priced at the cost at which that consignment was placed in the stores. In other words, materials received first are issued first. The units in the opening stock of materials are treated as if they are issued first, the units from the first purchase issued next, and so on until the units left in the closing stock of materials are valued at the latest cost of purchases.

This method is most suitable in times of falling prices because the issue price of materials to jobs or work order will be high while the cost of replacement of materials will be low. But in case of rising prices this method is not suitable because the issue price of materials to production will be low while the cost of replacement of materials will be high. The following example will illustrate how issues of materials are valued under this method.

## FIFO Method Problems and Solutions

Advantages: i Since materials issued for production are at the original cost, the inventory reflects the current market price, ii Profit and Loss Account and the Balance Sheet satisfactorily represent the actual conditions, iii When the price level is declining, the FIFO method shows a lower profit for income tax implications, iv Next to the Average Cost Method, FIFO is the most commonly accepted basis of valuation of issue, and v The method simplifies computation of the values of issues.

Demerits: i When there are price-fluctuations FIFO method makes the cost of production fluctuating from period to period, ii At the time of increasing price-level this method shows profit and inventory at higher figures which have unfavourable income tax implications.

Illustration: The following is a history of the receipts and issue of motives in a factory during February, Issues are to be priced on the principles of FIFO.

Stock verifier of the factory noted on 15th a shortage of 5kgs. Write out the complete Store ledger account in respect of the above motives for February, Issues of material were as follows:. Write the Stores Ledger Account in respect of the materials for the month of January. Under this method, issues are priced in the reverse order of purchase i.

This method is suitable in times of rising prices because material will be issued from the latest consignment at a price which is closely related to the current price levels. Valuing material issues at the price of the latest available consignment will help the management in fixing the competitive selling prices of the products. This method claims a few advantages: a The issue will be priced at the market rate prevailing, more or less, near the date of issue.

This has the advantage of ascertaining the cost at about the prevailing market price and the cost thus ascertained will enable the prices to be fixed on competitive basis.

It is not without reason that this method has come into use only when prices have been steadily rising.

Disadvantages: i The disadvantages of this method are the same as those of the FIFO method, namely, excessive clerical labour and differing costs of similar jobs using similar materials. This method may lead to over-recovery or under-recovery of cost of materials from production because quantity purchased in each lot is ignored. Disadvantages: a Profit or loss in material arises as total cost incurred usually does not become equal to the total charges.Adnan Naeem Imports, Ltd has the following information about the inventory of electronic components for October Requirement b : If company uses the FIFO method of allocating inventory costs, what would is the ending inventory?

Requirement c : If company uses the average cost method of allocating inventory costs, what would is the ending inventory for October? Malik Company uses a periodic inventory system.

The beginning inventory of a particular product, and the purchases during the current year, were as follows:. At December 31, the ending inventory of this product consisted of 55 and selling price during year was Rs. July 05 Purchases ………………………………………. July 09 Purchases …………………. July 13 Sales ………………………………………………………………. July 23 Purchases …………………………………………………………. July 26 Purchases …………………………………………………………. July 30 Sales ………………………………………………………………. Determine the Cost of Sales, cost of Closing Stock and Gross profit under each of the following method by using perpetual inventory system.

Inventory Valuation. Inventory Valuation MCQs. Principles of Accounting. Cost Accounting. Principles of Finance. Financial Accounting.

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Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Submit Comment. Problem 2: Adnan Naeem Imports, Ltd has the following information about the inventory of electronic components for October At the end of October, components remained in inventory. Problem 3: Malik Company uses a periodic inventory system. The beginning inventory of a particular product, and the purchases during the current year, were as follows: Jan.

Opening Stock ……………………… units Rs. Purchases ……………………………… units Rs. Sales …………………………………… units Rs. Purchases ………………………………80 units Rs. Purchase ……………………………… units Rs.The Delta company uses a periodic inventory system. The beginning balance of inventory and purchases made by the company during the month of July, are given below:. Required: Compute inventory on July 31, and cost of goods sold for the month of July using following inventory costing methods:. Computation of inventory on July 31, i, e.

Alternatively, we can compute cost of goods sold COGS using earliest cost method as follows:. Alternatively, we can compute cost of goods sold COGS using most recent cost method as follows:. Alternatively, we can compute cost of goods sold COGS by deducting ending inventory from cost of goods available for sale:.

Which of the methods mentioned above will yield the lowest figure of the gross profit in the income statement? Hi Arslan, we have an exercise that answers your question. Units from July 18 purchases. Under LIFO, the units are assigned cost using earliest prices.

This was great, however most questions I am coming across need to be answered via spreadsheet work. Do you have the solution on video as an excel spreadsheet solution by chance?

I thought the LIFO is last in first out. Because the most recent purchase means that it is the Last In, so it means that it should be out first. Skip to content Menu.

The Delta company sold 1, units during the month of July. Show your love for us by sharing our contents. Thanx a lot now I have got simple way of calculating the inventory. Will there be a change in the unit cost if there is purchase return or sales return? Thank you very much for your work it has made me understand. I really understand thanks Reply. I am very glad for this explanation thanks Reply.

Limitless thanks to you, it is a unique lesson. Stay inafrmotive, San Diego, yeah boy! Does the presence of a sales return or purchase return affect the results? This is really insightful. FIFO Reply. Any one of u having manual of cost accounting by matz usry 9th edition plzzzzzz help me Reply. I am Very much interested to your illustration thankou Reply. Is this under perpetual or periodic Reply.