Last-In-First-Out (LIFO)

Posted in Finance, Accounting and Economics Terms, Total Reads: 685
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Definition: Last-In-First-Out (LIFO)

LIFO is an inventory accounting method which has been recognized by the Internal Revenue Code since 1939.

This method is created under the assumption that you sold the new stuff as soon as you purchased it

LIFO implies that the items which has been recently purchased will be sold first. Cost of goods sold is calculated by using latest prices, while ending inventory is calculated using the oldest prices.

Business with inflating inventory costs like LIFO.

 

Example:

X runs a Candy shop. He enters into the following transactions during July:

July 1 Purchases 1,000 candy at Rs.1 each.
July 10 Purchases 800 candy at Rs.1.20 each.
July 15 Sells 600 candy at Rs.2 each.

Number of candies at the end of the month?

1,000 + 800 – 600 = 1,200 candies

Date

Details

Number

Rs/unit

Value(Rs.)

Jul-01

Purchases 1,000 candy at Rs.1 each

1000

1

1000

Jul-10

Purchases 800 candy at Rs.1.20 each

800

1.2

960

1800

1960

Jul-15

Sells 600 candy at Rs.2 each

600

2

1200

Balance

1200

1360

Sales

600

2

1200

Cost of Goods Sold

600

1

600

Profit

600

As you can see, even though the purchases amounted to Rs.1,200, the cost of goods sold (or cost of sales) amounted to Rs.600.

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