There are a number of inventory valuation methods that can be used according to the business requirements and managerial decisions. Inventory valuation methods are named as LIFO, FIFO and they have a negative or a positive impact on the financial performance of your business. Both of these methods can be understood with the help of examples.
Assume that a company ABC purchased an inventory on three different periods of the financial years at different prices. The total price of the inventory is say $ 500 where price of each item is $10 and the total numbers of units are 50. In order to find out how many items are sold from the inventory we can use the following formula
Number of unit in inventory+ Total Amount of purchases= Goods available for sales
50 + 500 = 550
Now we can minus the goods remaining in the inventory from goods available for sale to get the number of items sold
550 – 75= 475
This means that the number of items sold is 475
The FIFO Method
The FIFO method as it name indicates is First in First Out method. In this method the items that are purchased first are sold first. In the words of accounting we can explain that cost associated with the inventory purchased first is the cost that is expensed first.
The LIFO Method
LIFO stands for Last in First Out that means the most recently purchased items are sold or disposed first. With the help of LIFO companies can reduce the amount of tax to be paid in the time of inflation.
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