Accounting
Accounting implications of valuing inventory under FIFO method
FIFO stands for first in first out. That means that the goods which comes in stock firstly will be dispatched (sold out) firstly. So it means that closing inventory is being stated at the latest stock price under this method.
In the period of rising prices of the fast moving consumer goods, when company’s inventory in being valued under FIFO method then the closing stock will be highest. Closing stock directly affect the cost of goods sold ( i.e. CGS) and the CGS directly affect the profit of the company and under this specific situation, net profit of that FMCG Company will be high due to decreasing CGS.
Accounting implications of valuing inventory under LIFO method
LIFO stands for last in first out. That method is exactly opposite of the FIFO method. In this method, goods which come in the stock firstly will be dispatchedlastly. So inventory in this method is being valued at the oldest price of the stock (i.e. goods).
In the period of rising prices of the fast moving consumer goods, when the company’s inventory is being valued under LIFO method then the closing stock will be lowest. Cost of goods sold of that company will be high because of valuing inventory under LIFO method during the period of rising prices and then ultimately profit of that company will be low
That method of valuing inventory is outdated these days and is excluded under the IFRS (International Financial Reposting Standards).
Bibliography
Jun, J. (2011, 03 27). FIFO LIFO Inventory Valuation Methods. Retrieved from oldschoolvalue.com/blog/valuation-methods/fifo-lifo-average-inventory-valuation/: http://www.oldschoolvalue.com/blog/valuation-methods/fifo-lifo-average-inventory-valuation/
Nordmeyer, B. (2012, 07). What Is the Meaning of LIFO & FIFO? Retrieved from smallbusiness.chron.com/meaning-lifo-fifo-31050.html: http://smallbusiness.chron.com/meaning-lifo-fifo-31050.html
UIC. (2011, 03). FIFO / LIFO. Retrieved from uic.edu/classes/actg/actg516rtr/Notes/06-IRS-FIFO-LIFO.htm: http://www.uic.edu/classes/actg/actg516rtr/Notes/06-IRS-FIFO-LIFO.htm
