FIFO and LIFO Methods

To value inventory there are two common accounting methods -

1. FIFO

2. LIFO

How do you value inventory?

FIFO method is mostly used by many organizations. Basically FIFO or LIFO is used for two reasons -

A. For pricing : It shows the way how the inventory`s selling price is set.

B. COGS – It is also used for value of inventory and the value of your cost of goods sold.

1. FIFO – FIFO stands for “first in, first out”. First item that comes into your warehouse will be the first item shipped out. It means oldest item will be sold first. For example, if a retailers buy 10 cell phones in January 16 and 20 cell phones on 17 January on January 16 he paid $50 for each cell phone and on January due to price hike he had to pay $60 for same cell phone. He sold 25 cell phones in the year. Using FIFO method cost of goods sold would be – {10*$50 + 15*$60 =$1400}. According to FIFO method this $1400 is considered valuation of inventory.

2 LIFO – LIFO stands for “last in, last out”. This method is vice – verse of the FIFO method. Last item that comes into your warehouse will be the first item shipped out. It mean newest item will be sold first. According to above example if you use LIFO method than cost of goods sold would be – {20*60 + 5*50 = $1450}. Now it is simple according to LIFO method this $1450 is considered valuation of inventory.

As far as choosing of method is concerned, though FIFO is mostly used but there are also some advantages of using LIFO method. You have to chose the method considering the price. It depends whether prices are rising or falling.