Inventory Management LIFO, FIFO

[anne.chithraanjan1]

Hi There!
Just a quick question about LIFO, FIFO and JIT. I understand how to work these out mathematically however i'm struggling to apply this in some cases like When a questions asks which inventory valuation will maximise profits, how do i work this out.

E.g Question: A business is experiencing increasing costs for its stock over time. It is seeking to maximise its profit for the current financial period. Which inventory valuation method should the business use?
(A) Last-in-first-out
(B) Just-in-time
(C) Just-in-case
(D) First-in-first-out

[Opengangs]

Here's how I understand the question.

First-in-first out refers to a method assuming that the first units being produced into an inventory is the first to be sold, while the last-in-first-out method assumes that the last unit being produced into an inventory is the first to be sold.

As we keep the inventory, the value of the product increases over time. For instance, the price of the product at that time may increase, leading to an increased cost, so in order to maximise its profit, we want to sell the product as quickly as possible to reduce the costs of the inventory from increasing over a longer period of time.

Thus, we want to use the FIFO method or (D).

[MisterNeo]

Hi There!
Just a quick question about LIFO, FIFO and JIT. I understand how to work these out mathematically however i'm struggling to apply this in some cases like When a questions asks which inventory valuation will maximise profits, how do i work this out.

E.g Question: A business is experiencing increasing costs for its stock over time. It is seeking to maximise its profit for the current financial period. Which inventory valuation method should the business use?
(A) Last-in-first-out
(B) Just-in-time
(C) Just-in-case
(D) First-in-first-out

Hey Anne! (It's me)

FIFO and LIFO valuation measures cost of goods sold.
You would need to know the equation for profit calculation:
Sales minus COGS equals G.Profit.
The way to achieve a high profit on the balance sheet is to indicate a low COGS, This means that all stock sold is valued at the cheapest stock, which is the first goods sold.
Therefore, FIFO would be used to record a higher profit since you subtract a smaller number from sales revenue.
LIFO would be the opposite since you inflate the value of your COGS, thus reducing profit value.

Hope this helps

[anne.chithraanjan1]

Ohh Okay, that clears it up, Thankyou so much Opengangs and Danny