How to Calculate FIFO & LIFO
What form do you use to value your inventory in accounting? The system you use to value your inventory may have an impact on the amount of taxes you pay the government. Have I gotten your attention yet? The most popular methods in use in the United States are LIFO and FIFO, but which one is best for you depends on your specific business needs.
What Is LIFO?
LIFO is the polar opposite of FIFO, assuming that the most recently added products to a company’s inventory are sold first. In the COGS (Cost of Goods Sold) estimate, the business can use certain inventory costs.
LIFO stands for “Last-In, First-Out”.
When the cost of inventory is rising, perhaps due to inflation, the LIFO method of financial accounting may be preferred over FIFO. Because the more expensive items in inventory are sold off first, the cost of a sale will be higher when using FIFO. Furthermore, since a corporation would make less profit, the taxes it will pay will be lower.
FIFO and LIFO Inventory Accounting
FIFO, first in-first out, means the items that were bought first are the first items sold. Ending inventory is valued by the cost of items most recently purchased. First-In, First-Out method can be applied in both the periodic inventory system and the perpetual inventory system.
The FIFO method is allowed under both Generally Accepted Accounting Principles and International Financial Reporting Standards.
In a company with fluctuating inventory prices, FIFO is a good tool for measuring COGS..