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
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Valuation Methods are First-in-Last-out (FIFO), Last-in-First out (LIFO) and Average Cost Method. These method are designed to calculate the cost of goods sold and cost of ending inventory. An explanation of the inventories valuation method are as follow: FIFO is assumed that items from the inventory are sold in the order in which they are purchased or produced. Purchase is of an out let as a store (Item) Produced is of a manufactory (Raw Material) With LIFO method inventory is sold first and older
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Receipts Cost Issue FIFO LIFO Jan 300 4.5 1,350 1,350 Feb 200 4.5 150 1,575 1,575 Mar 400 4.5 3,375 3,375 Apr 4.5 250 2,250 2,250 May 400 4.5 100 3,600 3,600 Jun 300 5 5,100 5,100 Jul 150 4,425 4,350 Aug 400 5 6,425 6,350 Sep 300 5 7,925 7,850 Oct 400 6,125 5,850 Nov 400 6 8,525 8,250 Dec 6 250 7,400 6,750 Total 2,700 1,300 Closing stock (FIFO) = £7,400 Closing stock (LIFO) = £6,750 The closing
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The controller suggested Rick to change the accounting method from LIFO to FIFO which would report to higher income figure in 2008 which subsequently would increase the taxes payable. Inference: After comparing income statements of year 2008 based on LIFO and FIFO methods we can observe a drastic impact it had on NET INCOME. NETINCOME is positive when FIFO method is used and negative when LIFO is used. • As per Colburn’s report,
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machinery, and equipment would have a prolonged effect on the assets useful life. 5.) The effect of LIFO inventory liquidation on its reported profits in 1984 are an increase in net income by $2.4 million or $0.20 per common share and a reduction in the net loss by $15.6 million. If a company performs LIFO liquidation, the old costs will be matched with the current higher sales prices. A company uses LIFO liquidation assuming that when it needs to replace inventory its repurchasing cost will increase
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Chapter 07 Reporting and Interpreting Cost of Goods Sold and Inventory ANSWERS TO QUESTIONS 1. Inventory often is one of the largest amounts listed under assets on the balance sheet which means that it represents a significant amount of the resources available to the business. The inventory may be excessive in amount, which is a needless waste of resources; alternatively it may be too low, which may result in lost sales. Therefore, for internal users inventory control is very important.
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However there are several treatments upon which they differ. When it comes to the treatment of inventory US GAAP allows for both the FIFO and LIFO methods to be used provided that they are accounted for consistently or provide sufficient reason for change. IFRS however strictly prohibits the use of LIFO and only recognizes the accounting for cost of goods sold on the FIFO or weighted average cost basis. This really is a very big stumbling block on the path to convergence because of the immense tax advantages
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| LIFO | | FIFO | | | | | Purchases | $6 X 100 | | $6 X 100 | | $7 X 200 | | $7 X 200 | | $8 X 140 | | $8 X 140 | Cost of goods available for sale | $ 3,120 | | $ 3,120 | Less: Ending inventory | $ 1,160 | | $ 1,400 | Cost of goods sold | $ 1,960 | | $ 1,720 | Since the cost of goods sold is $240 less under FIFO that is the amount of the phantom profit. It is referred to as “phantom profit” because FIFO matches
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E5-11 a) Compute Payton's gross profit. GROSS PROFIT = 900,00 - 540,000 = $ 360,000 ______________________________________ b) Compute the gross profit rate. Why is this rate computed by financial statement users? (360,000/900,000)/100 = 4/10of 100 = 40% This is known as the GROSS PROFIT MARGIN. ______________________________________ c) What is Payton's income from operations and net income? 1)Income from Operations = 360,000 - 230,000 = $130,000. 2)Net Income = 130,000 - 11,000
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from FIFO system, potential capacity and staffing problems, uneven workload among three underwriting teams, outdated SCT for computing TAT, and inaccurate computation process for TAT. In order to lower the number of late renewals and reduce turnaround time, our recommendations include, but not limited to, the following: 1) Making it mandatory for all departments to comply with the FIFO system and implementing monitoring plans for overseeing the entire underwriting process to ensure FIFO is strictly
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