lifo and fifo method
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LIFO AND FIFO LIFO AND FIFO METHODMETHOD
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 From the following data ,calculate the value of inventory on 31of inventory on 31stst Jan .1998 by FIFO Jan .1998 by FIFO
methodsmethods
1st Jan opening stock 200pieces @Rs 2 each4th Jan purchases 100 pieces @Rs 2.20 each 10th Jan purchases 150 pieces @Rs 2.40 each 20th Jan purchases 180 pieces @Rs 2.50 each2th Jan Issues 150 pieces 7th Jan Issues 100pieces 12th Jan Issues 200pieces
DATE RECEIPTS ISSUED BALANCE
Qty Rate Amt Qty Rate Amt Qty Rate Amt
1 Jan
2Jan4Jan
7 Jan
10Jan
12Jan
20Jan
100
150
180
2.20
2.40
2.50
220
360
450
150
5050
50150
2.00
2.002.20
2.202.40
300
100110
110360
200
5050100
5050150
180
2.00
2.002.002.20
2.202.202.40
2.50
400
100100220
110110360
450
Closing stock 180 quantityClosing stock 180 quantity2.20 units2.20 units180 * 2.50180 * 2.50
=450=450
EXAMPLE ON LIFOEXAMPLE ON LIFORecord the following entry in respect of material number Record the following entry in respect of material number 154 for the month of may 2008154 for the month of may 2008
May1 Balance 3000 units at Rs.9/unitMay1 Balance 3000 units at Rs.9/unit
May3 Purcheased 10,000 units at rs.10.20/unitMay3 Purcheased 10,000 units at rs.10.20/unit
May6 Purcheased 2000 units at rs.11/unitMay6 Purcheased 2000 units at rs.11/unit
May10 Issued 4000 unitsMay10 Issued 4000 units
May12 Purcheased 5000 units at rs.12/unitMay12 Purcheased 5000 units at rs.12/unit
May17 Issued 14000 unitsMay17 Issued 14000 units
MAY 19 Issued 1000 units MAY 19 Issued 1000 units
Date Receipts Issues Balance
Qty. Rate Amt. Qty. Rate Amt. Qty. Rate Amt.
May 1 --- --- --- --- --- --- 3000 9 27000
May 3 10000
10.20 102000 --- --- --- 3000 9 27000
1000 10.20
102000
May 6 2000 11 22000 --- --- --- 3000 9 27000
10000 10.20
102000
--- --- --- --- --- --- 2000 11 22000
May 10
2000 11 22000
--- --- --- 2000 10.20
20400 3000 9 27000
8000 10.20
81600
May 12
5000 12 60000 --- --- --- 3000 9 27000
8000 10.20
81600
--- --- --- --- --- --- 5000 12 60000
May 17
--- --- --- 5000 12 60000
8000 10.20
81600
--- --- --- 1000 9 9000 2000 9 18000
May 19
--- --- --- 1000 9 9000 1000 9 9000
Method : LIFOMaterial : 154
ADVANTAGES AND ADVANTAGES AND DISADVANTAGES OF FIFODISADVANTAGES OF FIFO
Advantages It values stock nearer to current market prices
It is cost based It is realistic DisadvantagesIt involves complicated calculationsComparison 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
CONCLUSIONCONCLUSIONDepending upon cost of raw materials
FIFO and LIFO methods are used.