LIFO AND FIFO

METHOD
 Inventory Valuation

DEFINITION:

Inventory refers to the stock of

goods in which a business enterprise deals with.
According to AS-2 (Revised) issued by the Institute
of Chartered Accountants of India
 Therefore the inventories include:
• Finished goods
• Work-in-Process:
• Rawmaterial & supplies

PURPOSE OF INVENTORY VALUATION

Proper valuation of inventory has a very significant bearing

on the authenticity of the financial statements. However, it
must be clearly understood that proper valuation of inventory
poses problem only when there is a change in the level of
prices and different lots are purchased at varying prices
 Following methods are generally used to
determine Historical cost of inventory:

• Specific identification.
• First in first out (FIFO)
• Last in first out (LIFO)
• Average (Weighted) cost.
From the following data ,calculate the value
of inventory on 31st Jan .1998 by FIFO
methods
1st Jan opening stock 200pieces @Rs 2 each
4th Jan purchases 100 pieces @Rs 2.20 each
10th Jan purchases 150 pieces @Rs 2.40 each
20th Jan purchases 180 pieces @Rs 2.50 each
2th Jan Issues 150 pieces
7th Jan Issues 100pieces
12th Jan Issues 200pieces
DATE
RECEIPTS ISSUED BALANCE
Qty Rate Amt Qty Rate Amt Qty Rate Amt

1 Jan 200 2.00 400

2Jan 150 2.00 300 50 2.00 100

4Jan 100 2.20 220 50 2.00 100
100 2.20 220

7 Jan 50 2.00 100

50 2.20 110 50 2.20 110
10Jan 150 2.40 360 50 2.20 110
150 2.40 360
12Jan 50 2.20 110
150 2.40 360
20Jan 180 2.50 450 180 2.50 450
Closing stock 180 quantity
2.20 units
180 * 2.50
=450
 EXAMPLE ON LIFO
Record the following entry in respect of material number
154 for the month of may 2008
May1 Balance 3000 units at Rs.9/unit
May3 Purcheased 10,000 units at rs.10.20/unit
May6 Purcheased 2000 units at rs.11/unit
May10 Issued 4000 units
May12 Purcheased 5000 units at rs.12/unit
May17 Issued 14000 units
MAY 19 Issued 1000 units
 Method : LIFO
Material : 154
Date Receipts Issues Balance
Qty. Rate Amt. Qty. Rate Amt. Qty. Rate Amt.
May 1 --- --- --- --- --- --- 3000 9 27000
May 3 10000 10.20 102000 --- --- --- 3000 9 27000

1000 10.20 102000

May 6 2000 11 22000 --- --- --- 3000 9 27000

10000 10.20 102000

--- --- --- --- --- --- 2000 11 22000

May 10 2000 11 22000

--- --- --- 2000 10.20 20400 3000 9 27000

8000 10.20 81600

May 12 5000 12 60000 --- --- --- 3000 9 27000

 ADVANTAGES AND
DISADVANTAGES OF FIFO
Advantages
 It values stock nearer to current market prices
 It is cost based
 It is realistic
Disadvantages
 It involves complicated calculations
 Comparison between different jobs using same type of material
becomes difficult
Advantages of LIFO Method:
•Nearer to the market price
•Income tax can be reduced
•No unrealized inventory

Disadvantages of LIFO Method:

•Not conform to the physical flow of goods
•Involves a lot of calculation work
•Comparison among similar jobs is very difficult
 CONCLUSION
Depending upon cost of raw materials
FIFO and LIFO methods are used.