Loading....
Coupon Accepted Successfully!

 

First-in-first-out-method (FIFO)

The FIFO method is based on the assumption that the goods which are received first are issued first. The ending inventory consists of the latest lots and is valued at the price of the latest purchase.


In periods of rising prices, higher income is reported since old costs are matched with current revenues. In periods of falling prices, lower income is reported since old costs (which are higher than the current costs) are matched with current revenue


This method is easy to operate, if prices of materials do not fluctuate very frequently

 

Format:

 

 

Illustration 1

 

A Ltd. provides you with the following information

  • 1-1-2012 Opening Stock 200 units at ₹ 2.00 per unit
  • 5-2-2012 Purchased 300 units at ₹ 1.50 per unit
  • 6-3-2012 Issued 400 units
  • 7-4-2012 Purchased 300 units at ₹ 3.06 per unit
  • 9-5-2012 Issued 350 units

Required: Compute the value of inventory and cost of goods sold as on 9-5-2012 assuming:

  • Perpetual system
  • Periodic System under FIFO method

Solution: (a)
 

Stock ledger under FIFO method (Using Perpetual system)
 

 

Particulars

A. Opening inventory

400

B. Add: Purchases (₹ 450 + ₹ 918)

1,368

C. Less: Cost of goods sold (₹ 400 + ₹ 300 + ₹ 150 + ₹ 765)

(153)

Ending inventory (A + B - C)

1,615


Statement showing the value of inventory and cost of goods sold under FIFO method (Using Periodic system)

 

Particulars

A. Opening inventory

400

B. Add: Purchases (₹ 450 + ₹ 918)

1,368

C. Less: Ending inventory (50 X ₹ 3.06)

(153)

D. Cost of goods sold (A +B - C)

1,615

Last-in-first-out method (LIFO)

The LIFO method is based on the assumption that the goods which are received last are issued first. The ending inventory consists of the earliest lots and is valued at the price paid for such lots. The ending inventory is understated in the Balance Sheet at old costs.


In periods of rising prices, lower income is reported since current costs (which are higher than the old costs) are matched with current revenues. In periods of falling prices, higher income is reported since current costs (which are lower than the old costs) are matched with current revenues


The value of closing stock does not indicate current market price because it represents cost of earlier purchases.

 

Format:

 

 



Illustration 2

 

A Ltd. provides you with the following information:

  • 1-1-2012 Opening Stock 200 units at ₹ 2.00 p. u
  • 5-2-2012 Purchased 300 units at ₹ 1.50 p. u
  • 6-3-2012 Issued 400 units
  • 7-4-2012 Purchased 300 units at ₹ 3.06 p. u
  • 9-5-2012 Issued 300 units

Compute the value of inventory and cost of goods sold as on 9-5-2012 assuming

  • Perpetual system
  • Periodic system under LIFO method.

Solution: (a)

 

Stock ledger under LIFO method (Using Perpetual system)
 

 

Particulars

A. Opening inventory

400

B. Add: Purchases (₹ 450 + ₹ 918)

1,368

C. Less: Cost of goods sold (450 + ₹ 200 + ₹ 918)

(1,568)

D. Closing inventory (A +B - C)

200


Statement showing the value of inventory and cost of goods sold under LIFO method (Using Periodic system)

 

Particulars

A. Opening inventory

400

B. Add: Purchases (₹ 450 + ₹ 918)

1,368

C. Less: Ending inventory (100 x ₹ 2)

(200)

D. Cost of goods sold (A +B - C)

1,568





Test Your Skills Now!
Take a Quiz now
Reviewer Name