Can someone break down the mathematical aspects of FIFO and LIFO --> eg how to calculate inventory if they are given a scenario ( sorry i dont have an example to give )
I understand the definitions of each and how it works i guess, i just dont understand the maths behind it
Thanks
Hey Deng,
Tell me if this makes more sense to you!
Month 1:
We buy 1000 of Product X at $100 each
Month 2: inflation occurs so prices increase
We purchase another 1000 of Product X but at $110 each
Month 3: inflation occurs again so prices increase
We purchase 1000 of Product X for $120 each
At the end of the financial year, we have sold all 3000 of Product X for $200 each (to make a profit) giving us $600,000 revenue
Using LIFOCalculating Gross Profit using LIFO principle:
600,000 - 3000 x 120 = 240,000
Using FIFOCalculating Gross Profit using FIFO principle:
600,000 - 3000 x 100 = 300,000
Therefore, you can see that what LIFO is used, it can overstate COGS and understate profits leading to less tax being paid; hence it is illegal to use as a valuation method
Does this clear things up?