LIFO and FIFO (1 Viewer)

[Lachyy]

could somebody explain to me the impacts of both, this textbook doesnt seem to do it very well

 

[Confound]

LIFO: stock purchased most recently sold first: On balance sheet: stock will be valued at older value so therefore will be lower than what it really is. On revenue statement: newer more expensive stock is sold first so there'll be higher COGS and lower profits. Disadvantage: may result in stock becoming outdated or spoilt

FIFO: first stock ever been purchased is oldest and will be sold first. Balance sheet: Closing stock will have higher value, thus increasing value of current assets. On revenue statement: COGS will be lower and profit higher than if LIFO was used

 

[seremify007]

LIFO: stock purchased most recently sold first: On balance sheet: stock will be valued at older value so therefore will be lower than what it really is. On revenue statement: newer more expensive stock is sold first so there'll be higher COGS and lower profits. Disadvantage: may result in stock becoming outdated or spoilt

FIFO: first stock ever been purchased is oldest and will be sold first. Balance sheet: Closing stock will have higher value, thus increasing value of current assets. On revenue statement: COGS will be lower and profit higher than if LIFO was used

Keep in mind LIFO/FIFO are purely inventory valuation methods to determine the value of inventory on hand and inventory sold for reporting purposes. It has nothing to do with stock becoming outdated/spoilt.

 

[nerdasdasd]

Keep in mind LIFO/FIFO are purely inventory valuation methods to determine the value of inventory on hand and inventory sold for reporting purposes. It has nothing to do with stock becoming outdated/spoilt.

What about its uses for creative accounting ?

Nvm...that isn't applicable for year 12 students .

 

[Drifting95]

What about its uses for creative accounting ?

Nvm...that isn't applicable for year 12 students .

Calm down big boy

 

[Pifty]

I'm pretty sure LIFO accounting is illegal in Australia and most of the world with the exception of the US... My business studies teacher mentioned this in class, saying that LIFO is manipulated by businesses to decrease their income tax and as a consequence, most countries use FIFO or a weighted average method of accounting stock.

For example say a business makes 1000 books for $1 each on Monday and another 1000 books for $2 each on Tuesday. The total cost of manufacture is $3000.
On Wednesday, they sell 1000 books for $3 each.

Using the LIFO approach, the books sold incur the cost of the last books manufactured, so that the cost recorded is $2000. The value of remaining stock is then valued at $1000.
The gross profit is then Sales ($3000) - COGS ($3000 - $1000) = $1000.

Using the FIFO approach, the books sold incur the cost of the first books manufactured, so that the cost recorded is $1000, and the value of remaining stock is valued at $2000.
The gross profit is then sales ($3000) – COGS ($3000 - $2000) = $2000.

Here, the LIFO approach allows for gross profit for a certain time period to be minimised to $1000, a good thing if a business is attempting to reduce income taxes.
I could be completely wrong but I'm pretty sure this is why LIFO isn't actually used in Australia. Worth mentioning to make sure people don't accidentally recommend using it for an Australian business in the case of a short answer or section III question involving accounting methods (very unlikely).

 

[Ally2014]

Is this for economics, accounting or business studies?

 

[JFX]

I'm pretty sure LIFO accounting is illegal in Australia and most of the world with the exception of the US... My business studies teacher mentioned this in class, saying that LIFO is manipulated by businesses to decrease their income tax and as a consequence, most countries use FIFO or a weighted average method of accounting stock.

For example say a business makes 1000 books for $1 each on Monday and another 1000 books for $2 each on Tuesday. The total cost of manufacture is $3000.
On Wednesday, they sell 1000 books for $3 each.

Using the LIFO approach, the books sold incur the cost of the last books manufactured, so that the cost recorded is $2000. The value of remaining stock is then valued at $1000.
The gross profit is then Sales ($3000) - COGS ($3000 - $1000) = $1000.

Using the FIFO approach, the books sold incur the cost of the first books manufactured, so that the cost recorded is $1000, and the value of remaining stock is valued at $2000.
The gross profit is then sales ($3000) – COGS ($3000 - $2000) = $2000.

Here, the LIFO approach allows for gross profit for a certain time period to be minimised to $1000, a good thing if a business is attempting to reduce income taxes.
I could be completely wrong but I'm pretty sure this is why LIFO isn't actually used in Australia. Worth mentioning to make sure people don't accidentally recommend using it for an Australian business in the case of a short answer or section III question involving accounting methods (very unlikely).

It's correct because in the end, using the LIFO approach is undervaluing the business's gross profit, which is a form of tax evasion, making it illegal in Australia.

Is this for economics, accounting or business studies?

Business studies, under inventory management of operations.

 

[Ally2014]

it is what i feared. thanks