...FIFO and LIFO Accounting Implications of Valuing Inventory under FIFO and LIFO Laura Lance Financial Accounting, ACC211 Instructor Suzanne Lozano 8 December 2011 FIFO and LIFO 1 Accounting Implications of Valuing Inventory under FIFO and LIFO LIFO and FIFO Inventory Accounting Methods The two most common methods of inventory accounting are Last-in-first-out (LIFO), and first-in –first out (FIFO), choosing the correct method of inventory accounting could be detrimental to the income statement and the statement of cash flow, and also it would affect the balance sheet of the company. For a company, it is imperative that they track their inventories and cost of goods sold. Both of these methods of accounting are a way they could do this. LIFO and FIFO are methods used for accounting for the inventory. I will discuss these two different methods. FIFO FIFO is a method that companies use whose inventories are like food or an item that could turn bad if not sold quickly. A company using FIFO normally looks better to investors then they are. It is sort of a false advertisement of higher profit then it should be reflecting. The good part of a FIFO method is that it reflects new purchases and with that would show accurate replacement costs. LIFO LIFO is a method that companies would use if their inventories were not perishable or had a wear out date. If and when cost of the items rise, the higher...
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...FIFO stands for first-in, first-out which means that the oldest items in the inventory are recorded as being sold first. At the end of the year the items left in inventory are the ones that were most recently placed there. FIFO Advantages The FIFO method is simple to understand as well as to operate. The method makes sense because the products that are made or received first are the first ones to be utilized or sold. FIFO helps to reduce old or outdated inventory by using it first before the newer inventory is received and sold. Another advantage of the FIFO method is that the inventory is stated at the current cost since those items are the most recent items placed into the inventory as either unfinished or finished goods for the current period. Since the inventory on the books at the end of the period are the products most recently received, the current market price that is on the balance sheets actually reflect the true price of these items. FIFO Disadvantages A disadvantage to the FIFO method is the fact that prices fluctuate, which could lead to error since products are received at different prices. The store ledger clerk would need to check their record in order to determine the price to be charged. Also, current costs cannot be matched up to current revenues when using the FIFO method. Current sales are matched with products which were older and cheaper, ignoring the true cost of replacing those goods which were sold. References Gupta, R. (2011). Advantages...
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...3217 DECEMBER 9, 2008 WILLIAM E. BRUNS SHARON M. BRUNS SUSAN HARMELING Merrimack Tractors and Mowers, Inc.: LIFO or FIFO? Ricardo “Rick” Martino, president and chief operating officer of Merrimack Tractors and Mowers, Inc., of Nashua, New Hampshire, felt that his job had grown much more complicated during 2007 and 2008. Merrimack was a major regional manufacturer and seller of large commercial grass mowers based on a design developed by his grandfather in the years after World War II. The company’s major competitors were John Deere, The Toro Company, Simplicity, and Husqvarna—much older and larger corporations with extensive lines of lawn care and maintenance equipment. Originally, Merrimack mowers were manufactured and assembled in a workshop and factory in Nashua. However, by 2008 the company was buying all of its tractors and machines, manufactured to its specifications, from a contract manufacturer in China, and it was operating almost exclusively as a machine-and-parts designer and distributor. The company had incorporated in 1980, and an initial public offering was followed by additional offerings of shares over the next decade. By 2008 the company had about 4,000 shareholders, including some mutual funds. About 25% of the outstanding stock was held by members of the Martino family, and shares were traded on NASDAQ. Rick had been elected president after the death of his father late in 1995. Martino’s father had initiated several changes and made decisions that led...
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...KASHFIA TABASSUM AHMED ROLL: RH-42 SECTION A IBA BBA 2OTH BATCH ACCOUNTING SUBMITTED TO: MELITA MEHJABEEN SUBMITTED ON: 30/ 04/ 2012 FIFO [ FIRST IN FIRST OUT ] | ADVANTAGES | DISADVANTAGES | * If the business trades perishable goods with the use of FIFO it can avoid obsolescence of stock. * Closing stock valuation is done upon the most recent prices paid for stock which takes into account the rate of inflation. * The method is more realistic as the inventory is issued in the order in which they have been received. * FIFO is acceptable method of inventory valuation as per Accounting concepts and conventions. * Inventory is issued to production at the price actually paid purchase them. | * At times of high rate of inflation FIFO values closing stock at the latest price which is high and hence the profit gets overstated as the cost of goods sold gets reduced. * Higher income taxes may have to be paid as FIFO results in profits being inflated. * Manufacturing firms do not issue raw materials at the latest prices and hence it forms a barrier to setting realistic price for the final product. * Identical inventory is issued to production at a different price simply because they are deemed to be made out of different batches of production. This makes the calculation of unit cost difficult as it varies for different batches of production. | 4 LIFO [ LAST IN FIRST OUT ] | ADVANTAGES | DISADVANTAGES | * The...
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...raw material, consisting of goods that are to be used in producing products. Overall, inventory should include all cost that are both ordinary and necessary to put goods in place and in condition for their resale. There are three basis approaches to valuing inventory that are allowed by Generally Accepted Accounting Principles (GAAP). First-in, first-out (FIFO) is an inventory method that assumes that the first items produced or purchased in the inventory are the first ones sold. This inventory method is acceptable under the U.S. Generally Accepted Accounting Principles (GAAP), as well as the International Financial Reporting Standards (IFRS). FIFO is most often used in accordance with the restaurant industry or businesses that deal with perishable products. This allows them to use all of their products before they expire or go to waste, which helps to lower their food costs. “In a period of inflation, FIFO produces a higher net income because the lower unit costs of the first units purchased matched against revenues. In a period of rising prices, FIFO reports the highest net income” (Kimmel et al, 2007, p. 278). FIFO is most recognized for the reason that it includes up to date purchases and, as such, more precisely reflects the price of substitutions. Last-in, First-out (LIFO) is an inventory method that assumes the last items produced or purchased in the inventory are the first ones sold. This inventory method is acceptable under the U.S....
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...FIFO, which is stand for “first-in-first-out”, is an inventory costing method which assumes that the first stock bought are the first ones to be sold, and the stock bought later are sold out later. Recently-placed goods that are unsold remain in the inventory at the end of the year. With this inventory valuation approach, the company accounts for the value of inventory received first when sales are made. One of the more common reasons a company chooses FIFO is because it is a more natural straight-line approach since account for the first inventory in as the first items sold. This makes it especially useful when tracking inventory items is simple LIFO, which is stands for “last-in-first-out”, is an inventory valuation method assumes that the last inventories bought are the first one to be sold, and the inventories bought first are sold out last. The goods placed first in the inventory remain in the inventory at the end of the year. Thus, when the accounting in most recently received inventory with first items sold. This actually gives a more realistic look at the market costs of the inventory when sell since it is sold shortly after received. A main reason companies choose LIFO during periods of inflation, though, is that it helps keep current taxable income low since more recent purchases typically have a higher cost basis The weighted average method uses average costs over the reporting period to calculate the inventory balance. It is a new average cost is calculated...
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...DESIGNING SYNCHRONOUS FIFO AND ITS VERILOG IMPLEMENTATION IN HARDWARES Submitted in partial fulfillment for the requirement for the award of degree of bachelor of technology in Electronics and Telecommunication Engineering [pic] School of Electronics Engineering KIIT UNIVERSITY Batch: 2008-2012, Group-8 Under the guidance of Mr. S.Padhi An End-Semester Project Report Submitted by: Akshay Prakash-804008 Avinash Kumar-804029 Ayush Bansal-804031 Barun Kumar-804034 Deepak Kumar Barnwal-804044 KIIT UNIVERSITY, BHUBANESWAR [pic] CERTIFICATE This certificate is to certify that this report entitled “AUTOMATIC VEHICLE PASS USING IMAGE PROCESSING” being submitted by Group-34: Akshay Prakash-804008 Avinash Kumar-804029 Ayush Bansal-804031 Barun Kumar-804034 Deepak Kumar Barnwal-804044 in partial fulfillment of the degree of Bachelor in Technology in “Electronics and Telecommunication engineering” is a bonafide work carried out at KIIT University under the supervision of project guide Prof. S.Padhi Prof A. K. Sen Mr. S.Padhi Dean E&TC Deptt. E&TC Deptt. KIIT University KIIT University TABLE OF CONTENTS: • ACRONYMS ………………………………………………………...3 • ACKNOWLEDGEMENT …………………………………………...4 • HISTORY ……………………………………………………………5 • ABSTRACT...
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... LIFO or FIFO Submission Date Sep-9-2015 Class: Accounting Submitted by Objective: Three companies changed their inventory accounting policy. Find the reason behind the change and analyze the impact of the change on the Balance Sheet and Profit & Loss. What accounting lessons we can learn from these two cases? Case 1 Questions 1. Use a table to show general effects of FIFO vs. LIFO Answer: Difference between FIFO and LIFO Market price rise | FIFO | LIFO | VS | Ending inventory | ↑ | ↓ | FIFO > LIFO | Total assets | ↑ | ↓ | FIFO > LIFO | COGS | ↓ | ↑ | FIFO < LIFO | Income tax | ↑ | ↓ | FIFO > LIFO | Net income | ↑ | ↓ | FIFO > LIFO | Current ratio | ↑ | ↓ | FIFO > LIFO | Return on investment | ↑ | ↓ | FIFO > LIFO | 2. (a)What factors should the management of Example Corporation in this case consider when deciding whether to switch from LIFO to FIFO at the beginning of Year 2? (b) Would this change impact the balance sheet or income statement in a material way? Why or why not? Answer: (a) When the company considers whether to switch its inventory method, the impact on the Balance Sheet and P&L for each method needs to be considered. FIFO will allow report of a larger ending inventory and greater net income, but the company will pay more income taxes. Continuing to use LIFO will lead to lower net income but lower taxes. FIFO will also...
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...program by the page size, and round up to the nearest integer. 510 ÷ 256 = 1 page 510 ÷ 256 = 1.9922 rounded 2 pages 256 or 254 remainder We need two pages to store the entire job. Exercise 4b: 510 ÷ 256 = 1 page 510 ÷ 256 = 1.9922 256 or 254 remainder 510 = 256 * 1 + 254 or 256 * 0.9922 = 254 bytes The exact location of Byte 510 is at Byte 254 of the second page (Page 1). The first 256 is located in Page 0 (first page). The remainder 254 is located in Page 1 (second page) byte 254. Exercise 5a: FIRST-IN FIRST-OUT Algorithm (FIFO) Page request a c a b a d a c b d e f Page fault * * * * * * * * * * Page Frame 1 a a a a a d d d b b b f Page Frame 2 c c c c c a a a d d d Page Frame 3 b b b b c c c e e Swapped Out: a , c, b, d, a, c, b According to the given information, this algorithm generates a page replacement scheme with 10 page faults. Failure ratio: 10/12= 83% Success ratio: 2/12= 17% Exercise 5b: FIRST-IN FIRST-OUT Algorithm (Increase a Page Frame) Page request a c a b a d a c b d e f Page Fault * * * * * * Page Frame 1 a a a a a a a a a a e e Page Frame 2 c c c c c c c c c c f Page Frame 3 b b b b b b b b b Page Frame 4 d d d d d d d Failure ratio: 6/12=50% Success ratio: 6/12=50% 5c: Statement The result was expected...
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...FIFO Process Cost Problems Dooley Chemical Company makes one product a supplement capsule taken to enhance a person’s focus and provide extra energy. They are sold primarily to students studying for and taking exams. The capsules are made in three steps: Blending, Encapsulating, Packaging. The company uses a FIFO process cost system. During the month of September 2014 the Blending department had a beginning WIP inventory of 12,000 units that were 100% complete for DM and 40% complete for Conversion Cost(CC). During the month the company started 160,000 units. At the end of September the Blending department had an ending Work in Process Inventory of 8,000 units 100% complete for DM and 80% complete for CC. Dooley’s Blending department had the following costs: Beginning WIP Direct Materials $24,000 Conversion Cost $4,800 Cost incurred in September DM $320,000 CC $160,000M Required: a. Use FIFO to do a 4 step cost of production report b. What is the journal entry to transfer the finished goods to work in process. Himax Chemical Company makes one product a marijuana capsule sold in the medical market in states where it is legal. The capsules are made in three steps: Grinding, Encapsulating, Packaging. The company uses a FIFO process cost system. During the month of September 2014 the Grinding finished 15,000 units and transferred it to Encapsulating. Encapsulating had a beginning WIP inventory of 1,000 units that were 100% complete for Transferred In (TI)...
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...INVENTORIES QUESTIONS: 1. Write down the definition of ‘Inventory’ under IAS-2. What physical materials does ‘Inventory’ include? 2. According to IAS-2, what are the components of non-components of Inventory Cost? 3. Distinguish between ‘Perpetual’ and ‘Periodic’ system for recording Inventory? Show proper examples. 4. What are the Cost Flow Formulas/Assumptions allowed in IAS-2 for maintaining Inventory? Show examples. Which one should be used in what situation? 5. Explain LIFO? Why LIFO is not permitted in IAS-2. Do you think repealing LIFO was wise decision of IASB? Discuss with its advantages & disadvantages. 6. What is NRV of an asset? When should company write down its inventories to NRV? Explain write-down processes with illustrations. * Write down the definition of ‘Inventory’ under IAS-2. What physical materials does ‘Inventory’ include? * Paragraph-6 of IAS-2 defines inventories as following- 1. Held for sale in ordinary course of business 2. In the process of production for such sale 3. in the form of materials or supplies to be consumed in the production process or in the rendering of services. This definition implies that 3 types of physical materials are to be included in ‘Inventories’- a) Raw Materials b) Work in process c) Finished Goods * According to IAS-2, what are the components of non-components of Inventory Cost? * Components of Inventory Cost: 1) Cost of Purchase Includes-...
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...A 5s Implementation Plan For The Shipping Department at Helical Products Co. By Eric William Walker A Senior Project submitted In partial fulfillment of the requirements for the degree of Bachelor of Science in Industrial Engineering California Polytechnic State University San Luis Obispo Graded by: Checked by: Date of Submission: Approved by: EXECUTIVE SUMMARY Helical Products Company is a business that manufactures flexure products, such as couplings and u-joints. As part of a movement towards lean manufacturing, Helical Products Company of Santa Maria, California is need of a principle that will help them continuously improve their shipping department. A study of 5S, a lean principle focused on waste reduction, will be done to investigate opportunity for implementation. A literature review takes a peek on research of lean manufacturing history, lean workbook/ tutorials and lastly case studies and journal articles. The output of research provides a design plan for Helical using 5S and other lean principles compatible with 5S, such as error proofing and Value Stream Mapping. A list of suggestions based on analysis and feedback from the Helical shipping department is provided. Lastly, a 5S manual catered for Helical Products Company is attached in the appendix. 1 TABLE OF CONTENTS Executive Summary....................................................................................................................................... 1 Introduction .......
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...The Psychological Impact of Fly in Fly out (FIFO) Lifestyle Introduction Imagine if you will being in an environment where the vast majority of the people around you have broken marriages, lost access to their children and or money due to the impact of their fly in fly out (FIFO) lifestyle. Over my 5 year FIFO mining career I have heard countless stories from my co-workers of heartbreak and sadness. Based on these real life examples and large subject pool spanning many years in the industry I have developed strong opinions on this particular subject matter. I recently took part in an online survey being conducted at CQU. I perceived the purpose of this survey was to try to find the impact that FIFO lifestyle has on families and relationships. To try and measure FIFO workers levels of life satisfaction as well as their families and how this roster had an impact on emotional wellbeing. After completing the survey I was left feeling unfulfilled and frustrated. The survey to me did not ask questions that allowed me as the participant to give a true account of what I thought was being asked. Even if the survey was not trying to get a depiction of the impact FIFO lifestyle has on families, I still felt it was not in-depth enough to develop an accurate representation of the vital aspects of this lifestyle. Participating in the study This survey in my opinion was trying to answer the long asked question of what is the impact of FIFO lifestyle on relationships and psychological...
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...Process Costing: The First-In, First-Out Method 1 FIFO Method of Process Costing In this supplement to Managerial Accounting we will illustrate the first-in, first-out (FIFO) method of process costing using the data for MVP Sports Equipment Company, which was given in Exhibit 4–4 in Chapter 4 of the text. Unlike the weighted-average method, the FIFO method does not commingle costs from two or more accounting periods. As the illustration will show, the costs from each period are treated separately. Step 1: Analysis of Physical Flow of Units The physical flow of units is unaffected by the process-costing method used. Therefore, step 1 is identical under the weighted-average and FIFO methods. See Exhibit 4–5 in the text. Step 2: Calculation of Equivalent Units A table of equivalent units, under FIFO process costing, is presented in Exhibit 4–A.* It is identical to the table prepared under the weighted-average method except for one important difference. Under the FIFO method, the equivalent units of direct material and conversion represented by the March 1 work-in-process inventory are subtracted in the last row of the table. By subtracting the equivalent units in the beginning work in process, we are able to determine the new equivalent units of activity accomplished in March only. The 20,000 physical units in the March 1 work in process have all of their materials, so they represent 20,000 equivalent units of direct material. However, these units are only 10 percent...
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... LIFO or FIFO Submission Date Sep-9-2015 Class: Accounting Submitted by Objective: Three companies changed their inventory accounting policy. Find the reason behind the change and analyze the impact of the change on the Balance Sheet and Profit & Loss. What accounting lessons we can learn from these two cases? Case 1 Questions 1. Use a table to show general effects of FIFO vs. LIFO Answer: Difference between FIFO and LIFO Market price rise | FIFO | LIFO | VS | Ending inventory | ↑ | ↓ | FIFO > LIFO | Total assets | ↑ | ↓ | FIFO > LIFO | COGS | ↓ | ↑ | FIFO < LIFO | Income tax | ↑ | ↓ | FIFO > LIFO | Net income | ↑ | ↓ | FIFO > LIFO | Current ratio | ↑ | ↓ | FIFO > LIFO | Return on investment | ↑ | ↓ | FIFO > LIFO | 2. (a)What factors should the management of Example Corporation in this case consider when deciding whether to switch from LIFO to FIFO at the beginning of Year 2? (b) Would this change impact the balance sheet or income statement in a material way? Why or why not? Answer: (a) When the company considers whether to switch its inventory method, the impact on the Balance Sheet and P&L for each method needs to be considered. FIFO will allow report of a larger ending inventory and greater net income, but the company will pay more income taxes. Continuing to use LIFO will lead to lower net income but lower taxes. FIFO will also...
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